- REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns.
- These are usually commercial properties (offices, shopping centres, hotels etc.) that generate rental income.
- An REIT works very much like a mutual fund.
- It pools funds from a number of investors and invests them in rent-generating properties.
- SEBI requires Indian REITs to be listed on exchanges and to make an initial public offer to raise money.
- Just like MFs, REITs are subject to a three-tier structure — the sponsor who is responsible for setting up the REIT, the fund management company which is responsible for selecting and operating the properties, and the trustee who ensures that the money is managed in the interest of unit-holders.
Problems with REITs in India
- Market regulator Sebi came out with REIT guidelines two years ago, helping real estate developers list their rent-yielding assets, and also providing large and small stock market investors with an inflation indexed product.
- REITs have been quite a hit in Asian markets such as Singapore and Hong Kong, but have stayed on the drawing board in India for the last many years.
- Market regulator SEBI has been tweaking its norms of REITs to enable them take off successfully, but progress has been slow.
- Countries such as the US and Singapore have seen REITs providing good returns but in India, issues such as lower rental yields and an illiquid and opaque property market have discouraged REITs.
- In real estate sector, both rent and capital appreciation from property depend on the location, infrastructure and industrial development around that area and REITs juggle these risks through a diversified portfolio of properties.
Significance of the first REIT listing
- With the initiation of REITs, if they take off, there may be light at the end of the tunnel for the struggling real estate sector.
- The Indian real estate sector has been facing a liquidity crunch on account of unsold inventory and low demand.
- REITs can help cash-strapped developers to monetise their existing property.
- Indian investors don’t have too many regular income options.
- SEBI requires REITs to distribute a minimum 90 per cent of their income earned to investors on a half-yearly basis.
- Similarly, 90 per cent of sale proceeds too are to be paid out to unit holders unless the amount is reinvested in another property.
- Thus, the investor gets to receive regular income and also gets to benefit from price appreciation, thereby boosting the returns.
- If REITs take off, one can invest in the property market with a minimum amount of ₹2 lakh, which is far cheaper than buying property.
- REITs can be a new asset class to explore.
- Most of the developers are bullish on this because they have already invested large amount in commercial properties which are generating good returns.
Section : Economics