By Divya Shukla
Last Sunday, I raised concerns related to the real estate sectors future growth prospects. There was the impending threat of imposition of the Land Acquisition Bill (from January onwards, next year) and abolition of the 75/25 (or 80/20 schemes by RBIs last governor). But, SEBIs move to allow REITs (i.e. Real Investment Trusts) is a step taken well in time. It is potentially instrumental in reviving the sector which has been experiencing some slowdown since past five years.
What exactly is a REIT? Its concept is similar to that of a Mutual Fund(MF), because REITs are corporations that own and manage a portfolio of real estate properties and mortgages. Investing in real estate, particularly commercial real estate has certain and obvious budget constraints, especially for a retail investor. But, REITs will make it easy for a retail investor to contribute his share with other small investors to the pool of resources and invest in large-scale commercial real estate as a group. Mainly its features are analogous to that of a closed-ended scheme of a MF; it is a security that sells like a stock on the major exchanges. So, individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. Therefore, it is also known as Real estate Stock.
In my last article, I had empathy for the retail investors, because of the two recent reforms introduced in the realty market. It was anticipated that prices will move upwards in the long-run, owing to the LARR Bill. Luckily, REITs has come to its rescue as it will provide them an avenue to properties in which they otherwise would not have been able to invest (as quoted by Mint). In other words, REITs invest in properties like- shopping malls, office buildings, schools, apartments, warehouses and hotels. Some REITs may also invest specifically in one area of real estate – shopping malls, for example – or in one specific region, state or country (Investopedia). So, REITs has its own special characteristics. It is an excellent way to grow their net worth, as REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
They also have a dividend-paying means of participating in the real estate market or DRIPs (dividend reinvestment plans) apart from fund pooling. As said before, it invests in various projects in one go, consequently, providing a diversification benefit (again like a mutual fund- not putting all the eggs in one basket). So, we see the innumerable pluses for investments in REITs, when the sector had been going through a troubled future.
Thus, it is a perfect time for REITs. There was a concern about drying up of liquidity. Fortunately, REITs will help in attracting and channelizing the funds with great efficacy, thus, maintaining liquidity in the market. Its a win-win for all the parties involved. A surge in the stock prices of the realty sector reflects the sentiment and the associated long-term prospect. It will ensure a steady source of funds to the developers and good returns to the investors at the same time. There was also a concern, as we lack a regulator for the realty sector. Fortunately, SEBIs move suggests that it will be playing this role. We can also count on REITs to speed up investments in infrastructure, which is very much needed at this point. We are not unaware of the role played by infrastructure in the growth process of a nation.
For a country like India, which is going through a worst growth crisis right now, it seems to have good long-term prospects.
A graduate with a Major in Economics degree from the renowned University of Delhi, the author is about to enroll for Masters program in Financial Economics in Babasaheb Bhim Rao Ambedkar University, Lucknow. Whilst this journey of financial economics is a career career path, has also developed a diverse field of interests, (especially in Economics, Politics, and Finance).