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What are real estate investment trusts? Are they active in India now?

By Finserv MARKETS - Aug 2,2019
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What are real estate investment trusts? Are they active in India now

Introduction

Consider the principle underlying mutual funds, but for real estate investments: pooling of small sums of money from a multitude of individual investors and then directly investing it into real estate property, and then return income from such investment to the unit holders.

What are real estate investment trusts?

The Real Estate Investment Trust (REIT) is an investment mechanism that invests a pool of money from various investors in rent-yielding and completed real estate properties. It isn’t a new concept globally, but in India, it has the potential to transform the market. This could, for starters, help in making real estate an organised market. It can also help unbundle the development and investment function of the property development business.

Status Quo in India

REITs are regulated by the securities market regulator in India – Securities and Exchange Board of India (SEBI). The SEBI (Real Estate Investment Trusts) Regulations, 2014 released in September 2014 called for providing a framework for registration and regulation of REITs in India. SEBI has given its approval for the Real Estate Investment Trust platform which will help in allowing all kinds of investors to invest in the Indian real estate market. It would create an opportunity worth Rs 1.25 trillion (US$ 19.65 billion) in the Indian market over the years.

A REIT in India is allowed to invest mainly in completed and revenue generating commercial real estate assets, either directly or through Special Purpose Vehicle (SPV) which invests more than 80% of its assets in properties. The REIT will have to distribute the majority of its income among the unit holders.

The Economic Tide

REIT will open channels for both commercial and infrastructure sector. In the first quarter of 2019, Embassy Group and Blackstone Group LP launched the country’s first REIT, which was oversubscribed on listing. This is a critical step towards formalizing the funding mechanisms prevalent in the sector. Reserve bank of India also proposed to allow banks to invest in REITs. Indian Banks, which are allowed to invest about 20 percent of their net-owned funds in equity-linked mutual funds, venture capital funds and stocks, could invest in these trusts within this limit. It is encouraging to see that Private Equity and Venture Capital investments in the sector reached US$ 4.47 billion in 2018, and it is a good omen for REITs:

What are real estate investment trusts? Are they active in India now

Features of REITs

Some key features of REITs worth knowing are as follows:

  • REITs are set up as a trust under the provisions of the Indian Trusts Act, 1882 and are registered with SEBI.
  • Like a mutual fund, it has three parties – Trustee, Sponsor(s) and Manager – to avoid any conflict of interest issues.
  • The Trustee oversees the activities of the REIT, the sponsors or investors hold at least 25% in the REIT for at least 3 years and 15% thereafter. Finally, the manager is akin to the fund manager for mutual funds.
  • All REITs will be listed with the stock exchanges, as they would be structured like trusts.

Since they are fairly new entrants in India, there are no benchmarks for REITs for comparisons and such.

Conclusion

The picture for REITs looks encouraging and promising, but in the absence of solid data about performance, there is little that can be said about how well these funds are doing in the Indian markets just as yet. In the meantime, if you want to invest and grow your money following the principle of pooling money for investment towards a common financial goal, managed by a professional fund manager, invest in mutual funds. The fund manager invests the sum into company stocks, shares and bonds, in accordance with your risk appetite. The Securities and Exchange Board of India (SEBI) regulates mutual funds in India. You can choose between equity mutual funds, that invest at least 65% of their funds into equity shares, or debt mutual funds that invest in a range of fixed income instruments that usually have an assured return. You can even choose to have a hybrid mutual fund, wherein investment is made in a mix of debt and equity. Finserv MARKETS makes the process of investing in mutual funds easy through a seamless process for opening an account in just a few clicks. In addition, you get financial planning tips and investment advice. At Finserv MARKETS, you get to invest in your desired products without losing money on commissions, so head over there now!

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