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All About Real Estate Investment Trusts in India

Neelansh Gupta

| Updated: Apr 09, 2019 | Category: RERA Registration

Real-Estate-Investment-Trusts

Across Asia, Real Estate Investment Trusts prove to be a viable choice for alternative investments, with successful launches in several Asian countries, including Japan, Singapore, Malaysia, Hong Kong, Thailand, Taiwan, and South Korea over the past decade or so. The reason being the global perception of India’s real estate market which is changing at a fast pace. So what precisely these trusts are and how can they prove to be an answer to the liquidity crunch that has been crushing the sector for several years.

What is Real Estate Investment Trusts (REIT)?

REIT is a company that owns, operates or finances income-producing real estate. Modelled after mutual funds, REITs provide all investors with the chance to own valuable real estate. Further, it presents the opportunity to access dividend-based income and total returns.

In simple words, REITs are securities link to real estate that can trade on stock exchanges once they get listed.

  • The structure of REITs is similar to that of a mutual fund. Just like mutual funds, there are sponsors, trustees, fund managers and unitholders in REITs.
  • Further, REITs invest in physical real estate.
  • Also, the money collected is deployed in income-generating real estate. Hence, this income gets distributed among the unitholders.
  • Besides, regular income from rents and leases, gains from capital appreciation of real estate also form a profit for the unitholders.
Real Estate Investment Trusts

Emergence of REIT across the world

In India, REITs formally got introduction in the budget session of FY2014-2015, laying the concrete foundation in the country. However, SEBI released detailed guidelines for the public issue of REITs in 2016 and Blackstone, a leading private equity firm, has taken the first step towards entering the REIT market in India. Need for organized sources of capital and changing regulations (RERA, Benami Act 201, etc.) further builds up the case for such instruments in the country.

Real Estate Investment Trusts

Advantages of REIT

Various benefits that REIT offer to their investors is:

  • It has a low entry point of around Rs. 2 lakh. Hence, an ordinary investor can add real estate to its portfolio at a much smaller investment.
  • Further, the return on investment projection is between 8-14% in the short-to-medium term with considerable low risk.
  • As regulations maintain that 80% of the REITs listings must be from rent-generating assets, it is less volatile than other asset classes like the stock market, mutual funds, and gold.
  • REITs guidelines maintain that at least 90% of the net distributable income after tax will distribute to investors at least twice a year.

Benefits of investing in REITs

  • Income is secured by long leases;
  • Liquidity;
  • Professional management;
  • Transparency;
  • Higher dividend; and
  • Portfolio diversification.

What are the types of REIT’s?

Various types of REIT’s include:

  • Equity REIT’s:

Most of the REIT’s are equity REIT’s only which buy, own and manage income-producing real estate. Also, Revenues generated primarily through rents (not by reselling properties).

  • Mortgage REIT’s:

Here in this, Mortgage REITs provide financing to real estate owners and operators either directly trough  mortgages and loans or indirectly through the acquisition of mortgage-backed securities. 

  • Hybrid REITs:

These REITs use the investment strategies of both equity and mortgage REITs.

Classification on the basis of shares being bought and held

  • Publicly Traded REITs:

Shares of publicly traded REITs listing on a national securities exchange, where they are bought and sold by individual investors. They are regulated by the U.S. Securities and Exchange Commission (SEC).

  • Public Non-traded REITs:

These REITs are also registered with the SEC but don’t trade on national securities exchanges.

  • Private REITs:

These REITs are exempt from registration with the SEC, and their shares do not trade on national securities exchanges.

Where does REIT invests your money?

SEBI specify the areas where investors’ money can be put in by a REIT.

  • As per the rules, at least 80 percent of the value of the REIT assets shall be in completed and revenue generating properties.
  • Also, the balance 20 percent may go in developmental properties, mortgage-backed securities, corporate debt of the real estate sector, equity shares of companies deriving not less than 75 percent of their operating income from real estate activity, government securities and money market instruments or cash equivalents. 

Importance of a Real Estate Investment Trust (REIT) in the Indian Scenario

  • A REIT could have a tremendous opportunity in the Indian real estate market with a growing economy, an existing portfolio of commercial real estate and conducive investment climate.
  • Further, a REIT could provide an attractive alternative investment instrument in the Indian financial markets.
  • Introduction of REIT can be a boon for developers and more so to the real estate investors as it helps in negating the shortcomings of investing in physical real estate.
  • This new investment vehicle offers an exit opportunity to developers thereby enabling them to monetize their real estate.
  • While on the other hand, a mandatory listing of the REITs on recognised stock exchanges will offer easy entry and exit mechanism for investors.
  • Likewise, for providing liquidity to the investors, REIT may be at par with equity shares trading on the exchange.

Following are some key highlights of the performance of REITs in key markets as per S&P Dow Jones at five year and ten-year milestones.

Real Estate Investment Trusts

Source: Dow Jones Real Estate Indices – S&P Global Property Indices Quantitative Analysis Report for Q3 2014

Hence, it is expected that a REIT in India would give returns similar to that of other countries represented on the table. Moreover, it is expected that a diversified REIT only focusing on rental income can generate profits in the range of 9 to 11 percent with an additional gain of 2 to 3 percent on capital appreciation, annually.

What are the Guidelines for Real Estate Investment Trusts?

A company must meet the following requirements to qualify as a REIT:

  • Pay a minimum of 90% percent of its taxable income in the form of shareholder dividends each year
  • 80% of the investment must be in properties that generate revenue
  • Moreover, Only 10% of the total investment must be in real estate under-construction
  • The company must have an asset base of 500 Crores
  • Also, NAVs need to update twice in each financial year

Wrapping Up

Although the market for Real Estate Investment Trusts is still at a nascent stage in India, we expect it to take up a more central role in the near future. Moreover, we anticipate that REITs becoming a reality in India and is likely to improve the quality of assets in offer, thereby further attracting the attention of global players to invest going forward.

For more information related to Real Estate Sector, kindly contact the team at Enterslice.

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Neelansh Gupta

Mr. Neelansh Gupta is a Legal Counsel having extensive in-depth knowledge of various laws. He has completed his graduation in law and has experience in IPR, Taxation and Corporate laws.

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