REITS

Finance Minister Arun Jaitley, while presenting the budget for 2014-2015, said that Real Estate Investment Trusts (REITs) would soon be allowed. To support the idea  Securities and Exchange Board of India (Sebi) in the month of August  firmed up regulations that will govern real estate investment trusts, or REITs, and so-called infrastructure investment trusts (InvITs) that the market regulator decided to allow. A move that will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net worth individuals, and ultimately ordinary investors

But how REITs will be a game-changer for Indian real estate and before that we also need to know what actually is REITS all about.

It is a security that sells like a STOCK on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of INVESTING in real estate. The concept Real estate INVESTMENT trusts (REITs) was originated in the USA in 1960s. REITs were created by US Congress to give all individuals the opportunity to benefit from INVESTING in income-producing real estate. Just as mutual funds do with equity and debt, REITs will pool money from investors and INVEST them in income-generating (rental assets) offering them a way to diversify their portfolios by investing in property.

There are internationally three types of REITS:

a)     Equity REITs: Equity REITs invest in and own properties ( thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties rents.

b)     Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgage. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

c)     Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

Few insights for REITS in India: The minimum public holding in REITs should be 25 per cent while the total number of outstanding units at all times as well as the number of unit holders — who are part of the public — should be 200.

Key benefits

1) Portfolio diversification: For small investors and institutions, REITs provide an opportunity to invest in largescale commercial real estate

2) A compulsory dividend payout (typically >80% globally and >90% in India) makes the underlying asset similar to a bond, with a growth component built-in through price appreciation.

3)  Tax concessions ensure that dividend payouts are healthy and less impacted by changes in central tax laws.

4)  Improved transparency and less volatile markets: REITs improve transparency in the real estate markets as information is periodically disclosed on average rents, occupancy levels, tenant profile, renewal profile, etc.

Further I would like to add more points to support this REITs term:

Nearly 30% of the country’s population is living in cities and urban areas and this figure is projected to reach 50% in 2030 based on which the present urban housing shortage is 1.87 crore units.

Overall housing shortage is of almost 6.3 crore units and the demand for houses are expected to increase by another 2.63 crore units in the next 3 years due to population growth at the current rate of growth.

With the above factors and nature of this new instrument we can conclude the things will become more prospective to bring/infuse more liquidity in the market.

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