INVESTMENT WISE – REITs Set To Pave The Way Forward

After the demonetization drive last year, the economy took a hit. And, one of the affect ed sectors is real estate. The sector is facing a liquidity crunch. Hence, given the current situation, is there an escape route? The answer is, yes! Real Estate Investment Trusts (REITs) could be the best way to bring in liquidity into the realty sector.“REITs are alternate investment instruments, which allow individuals to invest in real estate assets. A REIT can own or manage assets as a part of the portfolio and function on the lines of stocks, with investors serving as shareholders. In late 2014, the government released the finalized guidelines, facilitating REITs, with concerns regarding double taxation taken care in 2015 and clarifications given in the Union Budget of 201617, to expedite the launch of the country’s first REIT,“ Gaurav Kumar, MD (Capital Markets India) of CBRE South Asia Pvt Ltd, said.

HOW REITS WORK

REITs raise funds from investors and directly invest them in various real estate properties. REITs can invest either directly or through a special purpose vehicle (SPV). Where the investment is through a SPV, it is required to hold the controlling interest and not less than 50% in equity.Also, the SPV is required to hold 80% equity in the REIT’s assets. A minimum of 200 subscribers are required to form a REIT, excluding related parties, and the minimum public share in an initial offer should not be less than 25% of the number of units of the REIT.

WHO ARE INTERESTED IN REITS?

“REITs are attractive to both retail and institutional investors.Typical buyers of REITs also include pension funds, exchange-traded funds, foundations, endow ments, bank trust departments and insurance companies. Investors seek REITs for their high levels of continuous cur rent income and the opportunity for long-term growth,“ Shubika Bilkha, business head of The Real Estate Management Institute, says.

Experts say REIT as an investment vehicle has a huge opportunity in India. Neeraj Bansal, partner and head (building, construction and real estate sector) at KPMG, India, says: “REIT is expected to provide a recurring, relatively safe and a moderate-yield return. These kinds of returns are mostly sought by pension and insurance funds among global institutional investors.In addition to the institutional class, REITs are expected to see significant interest from retail investors. REITs are expected to unlock and attract a whole new set of retail investors who were unable to invest in commercial real estate due to certain factors like big ticket size, difficulty in entry and exit, property management hassles, etc. With a minimum investment of only Rs 2 lakh, we expect good participation from retail and high net worth property investors in REITs.“

IN A NUTSHELL

REITs provide new avenues of liquidity for the real estate segment. They will also help over-leveraged companies in getting themselves de-leveraged. Investors looking to further enhance their investments will be interested in REITs too.

source : internet