Real Estate Investment Trust (REIT): A new avenue for investors in India


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Introduction:
Mark Twain once divided the world into two kinds of people: those who have seen the famous Indian monument, the Taj Mahal, and those who haven't. The same could be said about investors. There are two kinds of investors: those who know about the investment opportunities in India and those who don't. India may look like a small dot to someone in the U.S. or Europe, but upon closer introspection, you will find the same things you would expect from any promising and matured market anywhere else in the world. The Indian Investors today show an unprecedented degree of financial prudence. The Government of India always laying greater impetus on the development of the infrastructure and real estate, the real estate investment funds hold significance to the investors and people are willing to invest in the real estate sector and reap profits through their investments. Real Estate investment trusts (REITs) can be an investment option for those seeking exposure to the realty sector amid lower demand and liquidity issues. Globally, the share of REITs in the overall real estate investment is quite significant. For instance, REITs—which were launched in the US in 1961—constitute 96% of the real estate sector’s total market capitalization today. In other markets such as Singapore, Japan and Malaysia, where REITs were introduced over the past two decades, they account for 55%, 51% and 42% of the total real estate market cap respectively. However in India, the share of REITs is just over 15% due to less exposure. But the times have changed now and if encouraged and properly uncover the concept of REITs, all kinds of investors (even those with smaller budgets) will make safe and rewarding investments in the Indian property market through REITs.  Let us now further examine the concept of REIT.

What is REIT?
REITs are securities linked to real estate that can be traded 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 unit holders in REITs. However, unlike mutual funds, where the underlying asset is bonds, stocks and gold, REITs invest in physical real estate. The money collected is deployed in income-generating real estate. This income gets distributed among the unit holders. Besides regular income from rents and leases, gains from capital appreciation of real estate also form an income for the unit holders. REIT’s are a legitimate way of investing in the real estate sector as they have the provision of getting enlisted in the known stock exchanges.

History of REIT:
REIT’s structured in the lines of mutual funds were first introduced in the United States in the 1960s through Cigar Excise Tax Extension Act to boost real estate development by way of existing investments from investors interested in holding stakes in the real estate sector.
In India, it was introduced by the Securities and Exchange Board of India (SEBI) in 2007 almost 50 years after they were first incorporated as an investment vehicle. REIT companies listed on Indian stock exchanges are monitored and regulated by the SEBI.

Registration of REIT:
A REIT must be a trust set up under the Indian Trust Act, 1882 and not as a Company or LLP and should be registered under the SEBI REITs Regulations. The parties to the REIT should be fit and proper persons as per in Schedule II of the SEBI (Intermediaries) Regulations, 2008. Further, multiple classes of units of REIT are not allowed.

Qualification of a Trust to be termed as REITs:
· 90% of the income must be distributed as a dividend to the investors
· 80% of the investment must be in properties that generate revenue
· Only 10% of the total investment must be in real estate under-construction
· The company must have an asset base of 500 crores.

Types of REITs:
There are three types of REITs available in India:
1. Equity REITs which purchase, own and manages the income-generating properties. The income earned is then divided among the REITs investors in the form of dividends.
2. Mortgage REITs which lend money directly or indirectly to real estate owners. Basically, Mortgage REITs earn income in the form of EMI’s which are then distributed among the REITs investors as dividends 
3. Hybrid REITs which are a combination of the first two.

How REITs work?
· Equity REIT’s hold in their vicinity properties such as offices, hotels, shopping centres, condominiums and draw most of their revenues from the rent of these properties.
· Mortgage REIT's look over the financing of the properties that may be residential or commercial in nature, thereby drawing income from interest earned on the investment in mortgages or mortgage-backed securities.
  

Investment in REITs and personal views:
April 1, 2019 will always be remembered as a red letter day for the Indian realty sector as on this day the very first Indian REIT was listed by the Blackstone-Embassy Group, a global private equity firm, which is open for investment. One of my mate asked this interesting question about REIT. Why to buy REIT shares and not directly buy commercial properties? I answered him because of the following reasons:
· Less Capital: Direct investment in real estate property is very capital intensive. But each share of REITs will be comparatively more affordable. (Min. Subscription Amount is  Rs. 2 Lacs per Applicant)
· Suitable for small Investors: Moreover, buying property directly exposes common men to the powerful builders. Investing through REITs will eliminate dealing with builders altogether.
· Transparency: REITs stocks are listed in stock market. Hence all the relevant details will all be available online for its investors.
· Assured Dividends: REITs generates income in form of dividend. REITs dividend payment is relatively assured. Why? Because most of their income is in the form of rental (lease) income.
· Tax Free: Dividend earned by the investors of REIT will be tax free.
· Fast Capital Appreciation: As Embassy REIT is first of its kind in India, its capital appreciation in next 5/7 years can be phenomenal.
· Easy to buy: REITS will also easy the whole process of investing in Real Estate Properties, how?
Imagine yourself buying a property for investing purpose? What steps one has to take while investing?
· Identify a good property,
· Investing the title,
· book a property,
· make self-contribution,
· arrange for balance funds (if loan is required),
· prepare a sale deed,
· registration of sale deed,
· payment of stamp duty, registration charges,
· payment of Goods and Services Tax (GST),
· taking of handover from present owner/builder,
· Maintenance of property etc.
But buying REITs (instead of directly a property) will eliminate all these steps. Again, properties developed by quality builders are expensive and are generally out of reach of common man. But REITs will clear this hurdle.
Investment in real estate market through REITs will give the accessibility to common man in which properties developed by the quality/trusted builders. Bangalore-based developer Prestige Estates has already created a REIT-ready structure. Mumbai-based realtors Oberoi Realty and Godrej Properties, too have proposed plans to launch REITs covering rent yielding assets. Real estate investment trusts (REITs) is an investment vehicle that can be used to attract private investment in the real estate sector and also will be helpful for relieving the burden on formal banking institutions. 
REITs are a great investment avenue not only for institutional investors but also for retail investors, who find it difficult to invest in the commercial real estate, which has a better rent yielding than residential properties. Unlike other equity investments, REITs provide assured returns to the investors through a compulsory dividend distribution policy. REITs are mandated to distribute 90% of their net distributable income as dividend. There is also a further upside potential for the investors from periodic property valuations. Moreover, if things go as planned, REITs is going to be the next big thing for the investment world in India, because it has capability to create a win-win situation for all.


"This article is authored by Umair A. Ansari, associate with Chitnis Vaithy & Co. His areas of practice are Real Estate Laws, Conveyancing, Commercial Laws, Insolvency Code, and Alternate Dispute Resolution.You can reach out to him at umairansari123@gmail.com."

Comments

  1. Very informative thing.

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  2. Fantabulous and so precisely defined Umair Ansari

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  3. Love this article! Please write more Umair Ansari sir

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  4. Thanks Umair sir for coming with this new concept.

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  5. New concept indeed. Would love read more about REIT

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  6. Very informative Article for Indians. New concept and we think it's a need of the hour as this pandemic will force everyone's idea of investment in Real Estate.

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  7. I have never heard of this. Thanks Umair for enlightening this vary concept.

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  8. Adv. Dheeraj Sharma19 May 2020 at 20:28

    Great work. Would love to invest in this new thing

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  9. Ar. Amrin Sayyed19 May 2020 at 20:54

    Didn't know this avenue before. Umair you are definitely doing a great job with the writing.

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  10. Keep it up Umair Bhai. You are inspiring us to read more and more.

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  11. Adv. Apeksha Kamble19 May 2020 at 21:29

    Good ��

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  12. Mashallah Umair you have that charm and you know what people want to read. Your last Article also shows that engagement and this one too from the audience.

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  13. Adv.Khushnuma Shaikh19 May 2020 at 23:08

    Very good write up Umair.

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  14. I like your style of drafting an Article. It is so easy to understand the whole concept with so much clarity.

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  15. CA Faiyyaz Shaikh20 May 2020 at 00:18

    Good work Umair. Nice to see such a new concept emerging in India.

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  16. Adv. Tauseef Shaikh20 May 2020 at 00:40

    If such kind of investment plan will be implemented it will help the economy in real estate sector.

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  17. Ashikesh Pawar20 May 2020 at 01:24

    Nice article Umair sir!

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  18. How do we track the Real Estate market to gain such insights? Any sources to keep a track of this on a daily basis?
    P.s: Btw great content Umair bhai, thanking you for pumping out some valuable and new content!

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    Replies
    1. Hello Chaitanya, I am pleased that you like this Article. With regards to your question, there are no specific means for keeping a tab on the Real Estate market. However, before purchasing or dealing with any of the units/ premises you should keep these things in your mind. Demand, Rarity, Ready reckoner rate etc. You can always check with the local broker and for cross-reference there are lot of real estate website on the internet.

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  19. Adv. Trannum Merchant20 May 2020 at 01:52

    Thanks....It is helpful article..Good work..

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  20. Hi Umair,
    Firstly congratulations for your publication. Please clarify that if capital gain money invested in REIT and i can still save on paying direct tax on it?

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    Replies
    1. Hi Nidhi, thanks so much for liking the present article.
      With respect to your question, exemption of capital gain is made available in the situation of long term capital assets transfer against the investment one makes in the residential property under Section 54(f) of Income Tax Act, 1961. However, your interest amount will be taxable. Please consult a professional Charted Accountant for more clarity.

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  21. Very good work Umair bhai

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  22. Nicely explained!

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  23. As this concept is new to me, Umair sir you have explained it very well.

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  24. Do REIT’s hold residential properties also?

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    Replies
    1. Hello! Thanks for making an effort to read this article. With regards to your question, REIT’s as of now are not investing in the residential component in India. However, in forthcoming years they may be.

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  25. Umair you’re doing an amazing job of enlightening us all by writing on such articles. I myself have never heard this concept before. Therefore I researched about REIT and wanted to comment that as a professional charted accountant, REIT’s are good for passive income, but definitely not for capital gains.

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    Replies
    1. Thanks so much sir for appreciating my work. I too second you on this. However, today's market is really suitable to invest in REIT’s because it will provide you with a stable return in the long run.

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  26. Thanks for the info man. Highly considering to invest in it once market reopens.

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  27. Really good informative breakdown of the concept of REIT’s.

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  28. Adv. Sana Khan20 May 2020 at 15:02

    Vey informative one Umair. Keep up writing such articles.

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  29. Adv. Aman Sinha20 May 2020 at 15:14

    Very well articulated bro. You’re giving some tough time to the professional real estate bloggers.

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  30. Hi Umair! Really knowledgable article. Just have a query that what is the possibility of returns? Is it monthly or yearly?

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    Replies
    1. Hi there. Thanks for such kind words. With regards to your query, REIT’s in India are giving returns in six months.

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  31. Adv. Sufiyan Siddiqui20 May 2020 at 15:28

    Fantastic job bro.

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  32. Loving your articles Umair. I'm learning so much.

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  33. Mahendra Shelar20 May 2020 at 15:48

    Hi Umair. As a CA and as a pro-investor in share market I believe that in the long run the higher dividends will be paid out and it should have a positive impact due to rent revisions.

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    Replies
    1. Thank you sir for reading this article in so much depth. I too agree with you that it will provide high dividend returns to the investors because every year the rent will be revised.

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  34. I am hoping to see more REIT’s in India soon.

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  35. Indepth knowledge and foresight makes this article truly amazing

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