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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.
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.
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.
Various benefits that REIT offer to their investors is:
Various types of REIT’s include:
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).
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.
These REITs use the investment strategies of both equity and mortgage 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).
These REITs are also registered with the SEC but don’t trade on national securities exchanges.
These REITs are exempt from registration with the SEC, and their shares do not trade on national securities exchanges.
SEBI specify the areas where investors’ money can be put in by a REIT.
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.
A company must meet the following requirements to qualify as a REIT:
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.