In short, a REIT (Real Estate Investment Trust) is a mutual fund that invests in real estate and acquires capital from the general public in smaller amounts. The earnings from the real estate, which is usually commercial real estate, are distributed to the investors in a form that is similar to dividend income. In even more nutshell, it’s a group of people contributing money for pooling together and investing in real estate for large scale investment, which is essentially regulated.
The advantage of REIT as an investment alternative lies in the fact that it gives the individuals an option to generate income along with capital appreciation with a small fraction of the money required to acquire the whole property. This is the only point of resemblance to mutual funds or stocks. The basic idea is to entitle the individual to a share of the property enabling him or her to earn a proportionate share of income after the due deduction of the percentage of the expenses.
REIT regulations in India only permit completely constructed and rented-out commercial properties, which according to the law, a REIT has to invest 80% of its investments in such properties. REIT only allows finished and completed properties enabling investors to earn rental income and excludes the speculative claims of the under-construction properties of the realty sector.
The idea is to bring up assets by development from different sources of money, convert them into income-generating assets, and eventually sell them to the real estate investment trusts. The funds so released can then flow to the realty sector to develop and build other assets. This is undoubtedly a great way to pump in liquidity in the real estate markets and is a prevalent cycle in the western markets.
In India, it is just introduced by the REIT bill, and the first REIT launched in India is Blackstone-Embassy in 2019. One among others is the Bangalore-based Prestige group who is planning to form a REIT and list its commercial REIT soon. Other business houses who are planning to form REITs and are in the pipeline are Pune-based Panchshil Realty, Mumbai-based Godrej Properties, Bengaluru-based RMZ Corp and few others.
Rules of the REIT Game
The question that is frequently asked is, whether REIT is exactly the same as mutual funds or stocks. Although there are similarities, there are differences too. A REIT is to be mandatorily listed on a stock exchange so that the investors can sell them easily, but the fair price cannot be easily discoverable. In the case of stocks, the capital gains or the dividends and even the interest on dividend income can be distributed by the fund companies either as dividends or bonuses in the ratios that help the investors. In the case of REIT income, no such transformation is permissible, and the income, rent or the dividend so generated will have to be distributed in the same form and be taxed at source as that. REITs are thus considered as less tax-friendly and having lesser flexibility than any other type of investment.
Unlike stocks, a REIT investment can serve as a fixed income investment that is capable of generating fixed income and can also generate capital gains when the investor wants to exit as the value of the asset increases. The experts say these operational issues matter for the investors who need to be careful of, and any form of investment has to be evaluated in terms of its liquidity, tax efficiency, flexibility, safety and returns.
The credibility of a REIT firm would obviously depend on the experience and the track record of the particular company which does not exist in India as REIT is just introduced. Real estate being a cyclical industry, the returns, and expectations, and the reality may not match with that of the speculator. Apart from that, the sector being more or less unorganized and not yet granted the industry status, there are many hidden agendas of the stakeholders and mechanisms that drive the industry.
Benefits to the Real Estate Sector
The debut of REIT couldn’t be better timed as the real estate sector is facing a deep liquidity crunch, and to take it out of the dreadful throes, the government has already allotted huge funding to be mobilized through the financial institutions. REIT seems to be an additional source of mobilizing funds to the real estate industry to save the industry from the liquidity crunch and simultaneously offers an additional lifeline for the inflow of foreign capital as well as domestic investors to pump in the severe needs of cash.
REIT helps the developers to immediately encash and unlock the value of their assets and helps in improving their liquidity by raising capital from the market. Developers and real estate promoters are also free to leave the commercial asset market and plunge into any market and focus on real estate development. This would help the developers to raise immediate capital as they can exit the property if it’s wholly constructed and reap the maximum returns on the investment.
The onset has already started, and Embassy-Blackstone REIT has already been launched with global investors having a strong reason to invest in Indian real estate. Many global investors are eying on the real estate sector of India through the REIT window, which includes North Carolina Fund of US, NikkoAmStraitsTrading Asia of Japan, Eastspring Investments of Taiwan, Sentry Global of Canada and few others.
Indeed, the global investors had their eye on the Indian real estate market, and with the success of the Embassy-Blackstone REIT, an optimistic signal has reached the globe, which points at ushering in more capital and FDI. This success of the REIT can undoubtedly trickle down to the other sectors of the real estate industry, making it cash-rich and asset classes like retail and logistics could also be included along with the real estate Infrastructure trust being flowing in which is in the pipeline for the government to implement.
The Future of REIT
The future of REIT in India looks pretty prospective, although it is currently centered along with the commercial real estate sector. The critics argue that the Indian residential sector is in need of more urgent cash flow than any other segment of the realty sector. But the reality is, that it will undoubtedly benefit the more significant players, and the cash would flow in the industry as the funds released from the commercial REIT can be used in any segment that the developers are focused on. Following this prospect of liquidity flow, many Indian developers have plans to start REITs, and few of them may also launch retail REIT in the immediate future.
Although the REIT is set with a good start, the success of the REIT would certainly depend on the benefits it offers to the individual and institutional investors. The current taxation structure is not congenial enough to attract and allure the individual investors in large numbers, and the operations of it also lack an adequate amount of transparency.
The mature markets like the United Kingdom have full tax exemption for the REIT from any form of income and capital gains arising out of property rental business. In other developed economies, there have been exemptions from stamp duty also. For Indian real estate as well, to join the global market of the REIT, there have to be similar tax benefits to be granted to make the investment option of REIT more lucrative both in the long and short-run.