The term “Real Estate” brings extreme connotations to one’s mind. We either think of a swanky DLF building and KP Singh or a property dealer in a safari suit, chewing paan. Thus, the average middle class person plans to consolidate enough funds over a lifetime to be able to buy one house.
The concept of Real Estate Investment Trusts (REITs) is highly intriguing. We all get a little cynical. But imagine being asked to invest money in Real Estate in the form of shares. You do not get a piece of land in return of your investment, rather a piece of paper. This paper signifies ownership.
REIT is an idea that treats the real estate market in a similar way as the stock markets.
Here’s a brief idea of what it actually entails and whether it would make for a good investment option.
1) What are REITs?
REITs are set up under the Indian Trust Act, 1882. REITs allows anyone to invest in portfolios of large-scale properties. It works on the same principle as that of an equity market. Investments are through purchase of stock. Just as shareholders benefit by owning stocks in other corporations, similarly stockholders of a REIT earn a share of the income produced through real estate investment. All this happens without going out and buying or financing property. Thus, it is now possible to own a percentage of a large property and earn returns on the same.
2) Where did this idea come from?
REITs originated in U.S. to give investors an opportunity to invest in income-generating real estate assets. After its introduction, several countries such as Singapore, Australia and Hong Kong implemented REITs successfully. To talk numbers, REITs raised a record amount of capital in USA in 2016 – $73.3 billion from the public markets. Out of these, a record $47.6 billion was in equity.
3) Why should one invest in it?
Risk Management: REITs offer the middle class investor a chance to invest in real estate. This is without facing the inevitable risks due to fluctuation in prices. For example, one can invest Rs. 2 lakhs in a property worth Rs. 2 Crores, and be the owner of one percent. This entitles one to one percent share of the rent generated from this property. Furthermore, this one percent share can later be traded for a profit whenever the unit holder sees a good opportunity.
Liquidity: Liquidity refers to the ability of an asset to be converted into cash. For years, investors considered real estate the ultimate immovable, non-liquid asset. One had to first find a buyer and go through the necessary hassles of registration. Not to forget a million other formalities. However, the liquidity of Equity REITs listed on major stock exchanges makes real estate investing fast, easy and efficient.
Transparency: REITs are to be registered and regulated by SEBI (Securities Exchange board of India). It will also adhere to highest standards of corporate governance, financial reporting and information disclosure. In this way, the REITs provide operational transparency.
4) What are the laws governing it?
REITs, although trusts, are governed and regulated by SEBI. Much like shares and securities traded in the stock markets SEBI will also regulate REITs by looking into the transactions and inspecting their books of accounts. In fact in September 2014, SEBI released the Regulations on Real Estate Investment Trusts. This provides regulations about various aspects, ranging from the issue of these units to all mandatory disclosures. It also deals with the eligibility and qualifications of people participating as trustees, managers and sponsors. Further, it provides for annual valuation which must be performed by a Chartered Accountant having valid accredition.
5) How can one invest in REITs?
Buying these REIT units follows the same procedure as that of the shares of any company listed on the stock exchange. The issue and allotment of units is through an IPO (Initial Public Offer) and an offer document (similar to a prospectus) that is listed on various stock exchanges. All units are issued only in the dematerialised form.
6) How much can one invest?
Rs. 2 lakhs is the minimum amount of subscription that is accepted by a REIT. However, the minimum asset size (value of the asset invested in) of an REIT is Rs. 500 crore. The minimum requirement to form a REIT is 200 subscribers.
7) What are the kinds of properties invested in?
REITs typically invest in rent generating properties. 90% of these proceeds are handed over to the unit holders as dividend. These range from shopping malls, offices and hotels to residential complexes and warehouses. Mortgages are however, not eligible to be treated as assets under REITs.
8) What about taxes?
Unit holders have to pay the taxes. But the REIT holders do not have to pay tax. Short term capital gain tax is applicable for unit holders at the rate of 15%. The dividends in REITs are exempted from tax, just like equity market.
9) Who can be a unit holder?
Any person who is not a trustee, principal valuer or another REIT can be a unit holder. This is to prevent insider trading. With respect to permission from the RBI and Government of India, foreign investors are also permitted. All unit holders have equal voting rights.
10) What do I do if there is a loss?
REITs typically invest more than a majority of their capital in rent generating properties. Hence, the chances of the investment sitting idle are less. While the average shareholder receives a dividend once a quarter, unit holders of REITs receive it in the form of their percentage of rent every month. Moreover in case of a loss, one can always trade the unit and sell it to a willing buyer over the stock market.
The scheme seems quite well thought of on paper. However, whether the execution is as impeccable as the blueprint is yet to be seen.
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