Aug 10th,2014 Update:
The Securities and Exchange Board of India (Sebi) on Sunday set the stage for launch of Real Estate and Infrastructure Investment Trusts, commonly referred to as REITs and InvIT.
In the final regulations, the market regulator has made some major changes to what it had proposed earlier. These include allowing foreign institutional investor (FII) participation and reducing the minimum asset size for a REIT. Those in the sector said these two new instruments had the potential of attracting nearly Rs 1 lakh crore to the cash-starved real estate and infrastructure sector.
The proposals were cleared at a meeting of the Sebi board, which was addressed by Finance Minister Arun Jaitley. In Budget 2014-15, the finance minister had announced giving a pass-through status to these trusts.
Real Estate Investment trust or REIT idea has again surfaced back in India. The move the country’s top regulator SEBI to introduce the scheme has called for widespread negotiations on the viability and potential of such a policy. Add to this, the fact that the Indian government choose to skip over the scheme back in 2008.
What is REIT?
REIT is basically a company that raises the capital required through an IPO and then sells its shares to its investors. With the capital raised, REIT buys real estate assets which are income providing. Some forms of REIT generate income by renting out the properties, while some others generate income by lending money to other real estate investors.
The income generated from such type of activities is distributed back to the investors in the form of dividends year after year.
Most of the REIT enthusiasts shell out a lot of advantageous for investing in REITs like
1. Capital is Raised –
REITs help to make sure that enough capital is raised to real estate development which in turn will develop the housing sectors.The present economy of our country would do well with such added investment and hence the reason why SEBI has thought of reintroducing the scheme to the public.
2. Diversify Your Portfolio –
REIT adds up as another investment arena for the investors who are looking for diversification of their portfolio.REITs provide flexibility in such way that the investors money invested in risk free real estate .
3. Low Income Groups can Also Invest –
REITs help individuals to invest in the real estate market without having to buy the property actually. Even lower amount of money can be invested in the real estate with the help of REIT.Buying a real estate property directly would mean investing a huge sum into that single project whereby REIT enables group buying which reduces the risks involved.
4. No Need to Manage the Property-
REITS helps the investors to invest in the real estate without ever having to go through the head-aches of managing the property and adhering to the land rules and formalities.Buying a real estate directly would mean a lot of tensions and rules where you will need to adhere to the applicable laws of the state and also make sure that the property is worth it all by yourselves.
5. Liquidity Investment –
REITs are a liquid asset. The shares of REIT can be bought or sold at any time as opposed to holding a real property where in your money is tied up as a brick and mortar investment. Liquidity to sell or buy the shares adds up as a real advantage of REIT as compared to a real property buying.
6. Regular Dividends-
REITs provide a consistent form of income for the investors in the form of dividends as most of the investments by REITs are based on long term lease agreements which increases the reliability . REIT shave been found to be paying more dividends than any of the stocks out there in the market in many countries.
7. No Corporate Tax-
REITs are expected to distribute around 90% of the income earned to the investors as dividends and hence it is exempt from the corporate tax. This has been done in many countries like USA to avoid any possibility of double taxation.
8. Interest for Real estate Projects in India-
REITs may be a huge success in India due to the simple idea that there is a huge amount of interest for housing projects in the country.Studies reveal that India and China are the most viable countries for the real estate projects considering the area and culture.
9. Secure Investment-
Since REITs manage tangible assets like real estate, land etc., the investment is more secure. Hence all over the world, an investment in REIT is considered as stable and risk free investment. The value of the property invested will keep on appreciating with time , even though the rate of growth might be slow.
10. Hedge Against Inflation-
REITs stand up against inflation as a hedge against it as the value of the property where the money is invested will keep on appreciating with the passage of time and take away the inflation factor off the cards.
REITs apart from the advantages mentioned above have found to be a stable form of investment which the investors will love to have. But implementing the idea of REITs in India will be a hard job for any regulatory body. But if ever implemented, I would definitely like to have a piece of that cake in my portfolio.