Many Indians have an intrinsic desire to own property. Apart from own use, it is perceived to be an attractive investment opportunity. But with increasing costs of real estate and construction, owning property has become relatively expensive, especially in urban areas. With the imminent introduction of Real Estate Investment Trusts (REIT) in India, it will soon be possible for Indians to own a small part of a fund, which owns a portfolio of real estate assets. In terms of concept, REIT is similar to Mutual Fund, with the underlying asset being real estate instead of stocks.
The Securities and Exchange Board of India (SEBI) drafted and notified regulations regarding Real Estate Investment Trusts in September of 2014. Over the years, many tweaks have been made in the regulations to suit the Indian marker. It is expected that the first REIT will be launched in the year 2018.
Understanding REIT & Its History
Right now, you might be wondering what exactly an REIT is. The origins of REIT can be traced to the United States where it was introduced to facilitate fractional ownership of profitable real estate assets. After its success in USA, many countries have successfully introduced and adopted REITs. REIT is a financial institution that provides finance or owns assets in the Real Estate sector. An REIT is owned by a number of investors, similar to a Mutual Fund. REITs generate income in the form of rentals, leases etc. The income that is earned by the REIT is paid out to its investors as dividends.
How Does a REIT Work?
The term ‘Real Estate Investment Trust’ may sound very complex but their working can be explained very easily. An REIT is based on the model of Mutual Funds. A REIT raises large amount of capital from its investors and the money is invested in real estate assets. Just like an investor in Mutual Funds, an investor in REIT earns income from the profits of the fund. REITs can invest in a range of assets like residential apartments, shopping malls, warehouses, office spaces, IT parks etc.
Different Types of REITs
There are two types of REITs.
1. Equity REIT
An Equity REIT is an institution that acquires physical real estate assets. It then rents them out to tenants for a fee. Many REITs also manage and maintain the properties that they own, through internal resources or third parties.
2. Mortgage REIT
Mortgage REIT firms purchase residential as well as commercial mortgages. They can also invest in mortgage backed securities. The income is the difference between funding costs of mortgages and the interest earned.
Key Stakeholders in a REIT
In an REIT, the following roles are critical to operation.
Sponsor: The individual or a developer who sets the framework of the trust. According to guidelines, there are a maximum of three sponsors allowed for a REIT, each holding five percent of the units of the REIT after listing.
Manager: The manager is an individual who is charged with day-to-day operations of the REIT. Relevant experience of at least five years is required in the field for an individual to be appointed manager.
Trustee: A Trustee is independent of the manager and sponsor. They hold the REIT assets in the name of the REIT for the benefit of the investors in accordance with the Trust Deed and the prevailing regulations.
Principal Valuer: A principal valuer is someone who is registered as a valuer according to the Companies Act of 2013 and has at least five years of experience in valuating assets. The Principal Valuer is charged with ensuring an unbiased and correct evaluation of the assets of the REIT.
Benefits, Challenges and the Future
The introduction of REITs is a welcome move, It will lead to: –
1. Provide a new stable source of funds to developers.
2. Allow small investors to deploy funds in real estate, without associated hassle.
3. Transparency in real estate.
The first REIT to be registered in India was Embassy Office Parks REIT. The first REIT is expected to be functional in 2018. It will be interesting to see how REITs fare in 2018!