By Sunanda Natrajan
Until now, homes and corporate office spaces in India have been bought and sold only for direct self-consumption, and no one ever contemplated a purpose beyond that. With the financial climate being sluggish and the market full of stockholders let down by unprecedented events, investing has been an activity restricted to monitoring the highs and lows of company stocks for far too long. This was the disappointing scenario until the Blackstone-backed Embassy Group announced their landmark decision to integrate real estate and investors into the same picture. Bengaluru-based commercial real estate developer Embassy Group is planning to launch the countrys first Real Estate Investment Trust (REIT), a concept that has already made its mark in foreign markets.
Understanding REITs
REITs are essentially companies that own, operate and finance income-producing real estate products. Modelled after mutual funds, REITs present investors with a portfolio of real estate assets that they can profitably invest in and earn dividend-based incomes without the hassle of actually going out, buying and maintaining the properties.
The primary objective of a REIT is to provide its investors with dividends generated from capital gains accruing from the sale of commercial real estate projects. The trust distributes 90% of the income as dividends to its client investors. Furthermore, REITs also provide advantages of reduced risk under professional management and diversified portfolio options for the investors to choose from. Probably the most attractive aspect of REITs is the fact that investors from lower-income groups with an amount as small as Rs.2 lakhs can also get in on the act and multiply their cash holdings.
Scope for REITs in India
The Indian housing market has more or less stabilised and has been fairly lucrative for savvy investors in the past decade. Underpinned by modest economic growth and increasing demand, the sector continues to witness an expanding interest of domestic participants as well as global capital in real estate investments. However, the sector is also characterised by various uncertainties related to the legitimacy of contracts and taxation, which prove to be heavy disincentives.
Furthermore, in the context of Indias population, people with lesser disposable income are completely left out from investment activity and therefore, a significant number of them are unable to enjoy benefits of the same. With REITs into the picture, ordinary people can become smart investors with money-spinning real estate properties as potential investments. Even for real estate developers who often find it hard to procure the required capital to build property, it will help boost capital access and even attract foreign capital into domestic investment avenues. Through Unsecured Debt (which is the hallmark of REITs), these trusts will help foster strategic and financial flexibility in the housing sector and bring about ease in measures and methods of investment through tax efficiency. Another chief concern is the declining vacancy in southern cities of Chennai, Hyderabad and Bengaluru. We must remember that 60% of the countrys Gross Domestic Product (GDP) is attributed to the urban areas and hence, it becomes imperative to ensure that major areas in urban towns and cities are not deficient in productive real estate property.
Previously, Indians invested in hard assets like gold. Now, they are gradually moving on from that tradition to engage in paperless transactions of more liquid assets, which further pave the way for REITs in the nation.
The way forward
Historically, REITs have provided competitive returns to investors based on long-term dividends and capital appreciation. In countries like Singapore and the United States of America (USA), REITs have paid off extremely well; the US-REIT introduced by the Congress had a market capitalization of USD 1 trillion in 2016 and since its launch in 2002, the REIT sector in Singapore has become one of the biggest success stories of the Singapore Stock Exchange (SGX).
A Cushman&Wakefield-Global Real Estate Institute Report suggests that the Indian real estate sector is likely to provide investment opportunity worth up to $77 billion through REIT by 2020. After the government exempted dividend distribution tax (DDT) from them, REITs can be the next big thing in India where managers avail approximately 20-30% discounts when buying under-construction properties and private equity firms can earn up to 26% returns on commercial investments. And with Indias capital markets regulator (Securities and Exchange Board of India) including hotels, hospitals and convention centres under the definition of real estate properties, the total REIT-eligible office stock in India is estimated to have a value between $44 billion to $53 billion.
Therefore, there is no doubt that REITs will paint a happy picture for the Indian housing market and when the first REIT listings go live, the country will definitely witness an exorbitant increase in institutional and retail investor participation in the sector.
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