With the floating of draft norms for listing Real Estate Investment Trusts (REITs), SEBI has revived a 5-year-old proposal, paving the way for opening new avenues for retail investors to safe and transparent investment in real estate, while at the same time providing a life-line to fund- starved developers, Vinod Behl writes …
Currently, due to prohibitive property prices, a large number of retail investors cannot afford to invest in real estate. Even close-ended real estate funds presently in operation with an investment cap of INR One Crore are beyond the reach of a large majority of ordinary investors. Moreover, they are apprehensive of investing in realty, due to low transparency and fears about the safety of investments in view of increasingly large number of delivery defaults. Retail investors are highly conscious about the safety of their capital over capital appreciation and attractive returns.
However, with REITs the safety of their investments could be ensured, as unlike physical real estate transactions REIT transactions will be regulated. Also, the REIT rules that prescribe 90 percent investment in completed projects and 75 percent in leased income-generating properties provide a safety net to investors, who will be insulated from the malpractices associated with real estate transactions. And REITs are investor-friendly as unlike physical real estate which lacks liquidity, investment in REITs is liquid and exit is as easy as in capital markets.
REITs (which are an extension of Mutual Funds) will facilitate retail investors to buy listed units like stock market shares. And REITs will be investing directly in income-generating assets or through SPVs, and investors can reap the benefit of regular returns on investment.
Besides investors, REITs are equally beneficial for the real estate sector, as they will provide an excellent platform to cash-strapped developers to generate funds without development risks, especially those who are sitting over good income-generating assets. The extent of business opportunity may be gauged from the fact that 400 million square feet of commercial office and mall properties are currently available in the market. And to make most of this opportunity, developers like Parsvnath have already announced their plans to list their income-generating assets as REITs to raise money.
Due to their high liquidity and easy exit options, REITs come as a good business opportunity for PE funds as well, who are sitting on huge resources but are reluctant to deploy them as exits are a question-mark. But now with REITs, they might be amenable to put in more money, in turn helping developers who are struggling to cope with liquidity crunches. Already, leading PE funds like Blackstone, Xander, Tata Realty & Infrastructure, and Kotak Realty have made public their plans to launch REITs. It is an equally big opportunity for funds-turned developers.
But then high taxation regimes in the form of capital-gains tax, tax on rental income and price appreciation, division and distribution tax, and securities transaction tax , will cast their long shadows over REITs, which in their present form might lose much of their sheen as an attractive investment option. SEBI has however proposed to amend norms to make REITs more tax-friendly. Industry bodies are also recommending a single-point tax structure – be it at the asset level or at the distribution level. But in view of the upcoming general elections in the country, the final guidelines for REITs may not come before Q2, 2014, and it may take more than a year before REITs become fully operational.
Apart from tax-related issues, regulatory concerns also need to be addressed before REITs are launched. In the past, several companies that raised funds through REITs on the London Stock Exchange, saw their stock prices crashing due to defaults in the delivery of real estate projects and investment mismatches. So, considering the risks involved in real estate investment due to lack of transparency and regulatory mechanisms, the government needs to come up with all necessary safeguards to ensure the safety of investments. And it will indeed be a wise move if the Real Estate Regulatory Bill is implemented before the launch of REITs, for them to realize their full potential in spurring capital inflows and investor confidence for the speedy and sustained growth of real estate.