REIT : Balm For Ill Realty

The latest moves to usher in a Real Estate Investment Trusts’ regime may prove to be a God-sent opportunity to mop up much-needed domestic and foreign funds for the beleaguered real estate as well as to bring in much-needed transparency for a sector whose reputation had taken a beating in recent time.

With foreign investors showing a growing appetite for the Indian real estate sector, the new draft on Real Estate Investment Trusts
(REITs) regulations released by the Securities and Exchange Board of India (SEBI) in mid-October 2013, will give a leg-up to the already bleeding cash-strapped sector. REIT is an investment vehicle that invests in real estate assets to generate income. It can also be listed and traded on the stock exchange.

Experts feel the SEBI move will definitely open up the real estate market’s access to funds. With the establishment of REITs, the beleaguered real estate industry may see prospective investors participating in quality real estate  investment with transparent pricing and a built-in liquidity mechanism.

Developers’ apex body CREDAI welcomed the much awaited move on allowing REITs in India. “It will definitely be a positive step for the sector since the liquidity position of developers could increase. I hope REIT will also result in  increased supply of foreign funds for the sector at a time when it is struggling for funds in view of the RBI restrictions and negative weightage given to real estate,” said Lalit Kumar Jain, CREDAI chairman and CMD, Kumar Urban Development Ltd.

Adds Neel C Raheja, group president, K Raheja Corp and member of the global board of Asia Pacific Real Estate Association (APREA), “This draft regulation is extremely contemporary and in line with global best practices. This regulated platform, along with tax benefits that are comparable to what other countries offer, is capable of providing a safe and attractive investment avenue to investors besides deleveraging the banking system. It will ensure improved transparency, higher corporate governance and will help free capital making it available for reinvestment.”

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The proposed changes allowing reduction in the minimum capitalisation for wholly-owned subsidiaries may soon allow foreign investors looking to invest in the real estate sector in India to bring in $5 million as minimum capital, down from the current $10 million, if the Union Cabinet approves the proposal of relaxing the conditions for foreign direct investment (FDI) in the sector.

“Earlier, developers could either go for private equity funding, strata sales or rental discounting. Now, they can float their own trusts or float them on exchanges,” said Ambar Maheshwari, managing director, Corporate Finance at Jones Lang LaSalle.

According to Morgan Stanley, these realtors would get a new avenue to cash out their assets by floating REITs and listing on the stock exchanges.

Understandably, the APREA, which promotes and  represents the real estate asset class in Asia Pacific, is optimistic of the possibilities. India has about 400 million sq ft of office and mall properties valued at `3.72 lakh crore ($60 billion).

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APREA chairman Lim Swe Guan says: “REITs have  attracted significant amounts of cash in recent years responding to investor demand for high yields and stable capital returns. Even though there has been substantial support for emerging Asia REITs, the
potential for even larger allocations by both local and global investors exists.”

“It will definitely open up the much anticipated real estate market. Now, SEBI has delivered on its part, it’s up to the government to focus on the tax regime and get it done to really kick-start the market,” said S Srinivasan, chief executive officer, Kotak Realty Fund.
The funds will have to be brought in within six months of commencement of the business of the company. This is expected to boost the low and affordable housing segment of the sector.

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“Setting up of REITs will allow investors to participate in quality real estate with transparent pricing and built in liquidity mechanism. This will help in further institutionalisation of the market,” said Rahul Rai, head, real estate investment business, ICICI Prudential Asset Management Company Ltd.

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Says Ruchir Sinha, head, private equity in real estate, Nishith Desai Associates: “REITs should likely emerge as a preferred form of asset-backed investment with established revenue streams, and will go a long way in protecting the interests of investors seeking exposure in real estate as an asset class.”
As far as developers are concerned, REITs will also create suitable exit opportunities for developers and financial investors and play an important role in bringing liquidity and transparency in the markets.

However there are legitimate concerns too. Anuj Puri, chairman and country head, Jones Lang LaSalle India, said: “The entire REIT framework was more or less withdrawn after the 2008 draft to make way for real estate mutual funds (REMFs) which eventually did not
materialise either. The cautious approach adopted by SEBI during this initial period is acceptable and appreciable. One concern is with regards to the strengthening of our legal framework surrounding real estate in India, which is a pre-requisite for REITs to thrive here.”

Realty analysts believe that the REIT regulations could benefit listed firms such as DLF, Prestige Estates and Phoenix Mills as well as unlisted ones such as K Raheja Corp andEmbassy Group, which have large rent-generating assets.

Rajeev Talwar, executive director, DLF, said: “It will make real estate sector more transparent and market-oriented besides opening new equity route for developers.”

On whether the company would float a REIT, he added: “It is part of our corporate strategy that these will be decided when things become clear”

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REITs have attracted significant amounts of cash in recent years responding to investor demand for high yields and stable capital returns. Even though there has been substantial support for emerging Asia REITs, the potential for even larger allocations by both local and global investors exists.
Lim Swe Guan, Chairman, APREA

India’s share of the global investable real estate market is expected to increase to 6 per cent in the next 20 years with the size of the domestic investable real estate market rising 16-fold over that period. India REITs are poised to capture a substantial share of such capital inflow: APREA.

The move will definitely open up the much anticipated real estate market. Now, SEBI has delivered on its part, it’s up to the Government to focus on the tax regime and get it done to really kick-start the market.
S Srinivasan, CEO, Kotak Realty Fund

•  What is REIT?
REIT is an investment vehicle that invests in real estate assets to generate income and it can be listed and traded on the stock exchange as well.
• Who will benefit the most?
REIT will open up new equity route for developers, especially those which have large rent-generating assets and create new avenues for investors.
•  What will be the impact on the markets?
REIT will play an important role in bringing liquidity and transparency in the markets.
•  What is the size and value of property space in India?
India has 400 million sq ft of office and mall properties valued at `3.72 lakh crore ($60 billion).
•  What is government’s agenda on FDI in real estate sector?
The DIPP is looking at relaxing the conditions for investment to boost the cash-strapped sector with a proposed reduction in the minimum capitalisation for wholly-owned subsidiaries from $10 million to $5 million. The move may boost low and affordable housing segments.

REITs should likely emerge as a preferred form of asset-backed investment with established revenue streams, and will go a long way in protecting the interests of investors seeking exposure in real estate as an asset class.
Ruchir Sinha, Head, Private Equity in Real Estate, Nishith Desai Associates

The entire REIT framework was more or less withdrawn after the 2008 draft to make way for REMFs – which eventually did not materialise either. The cautious approach adopted by SEBI during this initial period is acceptable and appreciable. One concern is with regards to the strengthening of our legal framework surrounding real estate in India, which is a pre-requisite for REITs to thrive here.
Anuj Puri, Chairman and Country Head, JLL

It will make real estate sector more transparent and market-oriented, besides opening new equity route for developers.
Rajeev Talwar, Executive Director, DLF

The new draft will definitely be a positive step for the sector since liquidity position of developers could increase. I hope REIT will also result in increased supply of foreign funds for the sector that it struggling for funds in view of the RBI restrictions and negative weightage given to real estate.
Lalit Kumar Jain, CREDAI Chairman & CMD, Kumar Urban, Development

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