Key Enabler

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Anshuman-Magazine2The huge implication of REITs in India’s realty investment market, which has remained out of bounds for the common man, lies in the fact that it will act as key enabler for capital markets in the country. The instrument will provide a safe and diversified investment option at reduced risks under professional management, to ensure the highest returns on investment

The biggest announcement for the real estate sector proposed by the newly-elected Government in its Union Budget 2014-15 was the Securities and Exchange Board of India (SEBI) being directed to introduce Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (lnviTs) in India.

Now that SEBI has announced the final guidelines for REITs and lnviTs, we expect these much-awaited investment instruments to provide alternative funding channels to the realty sector.

Going forward, REITs will also act as key enabler for capital markets in the country and provide investors with exit options. The industry perceives this announcement as the single most consequential reform witnessed in India’s realty sector in recent times, which will have significant positive impact on the market in times to come.

Investments in India’s commercial real estate has largely remained out of bounds for the country’s average citizen, as the realty sector so far lacked any monetisation vehicle for the capital intensive sub­ sectors of  the commercial  sector. Additionally, since such projects require huge capital inflow, broad-based portfolio investments by individual investors has hardly been feasible.

This new investment vehicle is characterised by its investment in real estate assets as well as limited liability for unit holders. REITs, for instance, provide low and mid­ income investors with   the opportunity   of becoming stakeholders in a portfolio of real estate assets, which would otherwise have not been feasible. REITs originated in the USA, and following their success were replicated across numerous economies across the globe. The USA, Australia, Japan and Singapore are among the most developed REIT markets in the world today, with their necessary regulatory frameworks in place, and significant representation of   such listed instruments   on   their respective stock markets.

The industry perceives this announcement as the single most consequential reform witnessed in India’s realty sector in recent times, which will have significant positive impact on the market in times to come

Although a detailed clarification on the tax structure for the newly-introduced REITs is still awaited, nonetheless, this is a positive move that would go a long way in reviving global investor sentiments in the India market.  Apart  from  a low  entry  level, the instrument will  provide a safe and diversified investment  option  at  reduced risks – all  under professional management, to  ensure the highest returns on investment.

The fact that SEBI’s final guidelines states “…REITs shall be set up as a trust and registered with SEBI” along with a trustee, sponsor(s) and manager, indicates that real estate is expected to be institutionalised. Moreover, reducing the minimum requirement for asset sizes permitted to be listed in India REITs from1,000 crore to 500 crore is likely to attract more income-generating assets in this new funding channel and encourage many mid-sized development firms to consider this avenue.

With not more than 10 per cent of the value of REIT assets to be invested in developmental properties, together with the rider that a REIT has to invest in at least two projects (with not more than 60 per cent of the value of assets invested in one project), SEBI plans to limit investor exposure to any single project.

The guidelines also try to ensure that the instrument structure mitigates risk factors to entice investors. The guidelines propose an initial offer size of 250 crore, with a minimum subscription size of 2 lakh, with resident as well foreign investors to be allowed to invest in the REIT.

Critical Success factors
Although it will arguably be the most consequential reform witnessed in India’s realty market in recent times, the successful implementation, operation and development of the I-REIT (Infrastructure-REIT market will depend on the following factors:
Clarifying tax liability
Establishing a clear regulatory regime
Providing faster and clearer structural reforms
Lowering or waiving transaction costs for asset purchases by I-REITs
Offering attractive risk-adjusted returns to investors
Restricting initial batch of listings to core stabilised assets
Increasing supply of investible assets
Broadening global investor base for income-producing assets
Increasing investor preference for REITs over development

key-EnablerThese investment vehicles are characterised by their investment in real estate assets as well as limited liability for unit holders. REITs, for instance, provide low and mid-income investors with the opportunity of becoming stakeholders in a portfolio of real estate assets, which would otherwise have not been feasible
REITs originated in the USA, and following their success were replicated across numerous economies across the globe. The USA, Australia, Japan and Singapore are among the most developed REIT/REMF markets in the world today
Numerous funds such as Blackstone have already started building a corpus of well-leased or sold completed commercial and residential properties, so that they are ready to issue as and when the Government of India releases its final policy framework on REITs
At a time when the realty sector is struggling for alternative avenues of funding-other than traditional banks and financial institutions – and private players are sourcing institutional capital, permitting REITs can act as key enabler for capital markets in the country, and provide investors with exit options.

Numerous funds such as Blackstone had already begun to build a corpus of well-leased or sold completed commercial and residential properties, in anticipation of the Government’s final policy framework on REITs.

This move is a positive signal for India’s capital markets as a whole, and the realty sector in particular. At a time when the realty sector is struggling for alternative avenues of funding – other than traditional banks and financial institutions – and   private   players are   sourcing institutional capital, REITs will act as a key enabler for capital markets in the country, and provide investors with exit options.

In terms of immediate challenges, although the Government has already clarified that India REITs will be given ‘pass-through taxation status, ‘clarifying the tax structure is of high importance at the moment. Moreover, while the performance of select commercial property hubs across India is improving, concerns over stagnant rental growth and oversupply remain.

A successful India REIT market will require strong support from existing landlords and investors, as well as favourable market conditions. All in all, the establishment of the REIT market in India is still at a very nascent stage; and successful implementation and development will rest on a number of factors related to the regulatory environment, market conditions and issuers/investors.

Although a detailed clarification on the tax structure for REITs is still awaited, nonetheless, this is a positive move that would go a long way in reviving global investor sentiments in the Indian market. Apart from a low entry level, this will now provide an avenue for channelising retail funds into the realty sector. Once formally introduced by SEBI, the instrument will provide for a safe and diversified investment option at reduced risks – all under professional management, to ensure the highest returns on investment

> The writer is Chairman and Managing Director, CBRE South Asis Pvt Ltd <