What are Real Estate Investment Trusts and why do we need them badly in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Recently, Securities and Exchange Board of India (SEBI) has put up Real Estate Investment Trusts (REIT) for public comments in order to draft the final set of guidelines.

So, what are REITs and what benefits can they provide to small investors with 2-3 Lacs of invest-able income? Can these investors invest small amounts in REITs? We explore here.

A real estate investment trust is basically a creation of the internal revenue code. It is a real estate company or trust that has elected to qualify under certain tax provisions to become a pass-through entity that distributes to its shareholders substantially all of its earnings in addition to any capital gains generated from the sale or disposition of its properties. Because the individual investor has the opportunity to pool his/her resources with those of persons of like interests, funds are assembled to permit purchase of buildings, shopping centers, and land in whatever proportion seems to offer the most attractive returns. Investments must be approved and management activities reviewed by a board of trustees who are accountable to shareholders and are ordinarily well qualified to make such decisions.


Following are the requirements to qualify as trust in countries where REITs are in existence for years:

Asset requirements:

1. At least 75% of the value of a REIT’s assets must consist of real estate assets, cash, and government securities.
2. Not more than 5% of the value of the assets may consist of the securities of any one issuer if the securities are not includable under the 75% test.
3. A REIT may not hold more than 10% of the outstanding voting securities of any one issuer if those securities are not includable under the 75% test.
4. Not more than 20% of its assets can consist of stocks in taxable REIT subsidiaries.

Income requirements:

1. At least 95% of the entity’s gross income must be derived from dividends, interest, rents, or gains from the sale of certain assets.
2. Minimum of 75% of gross income must be generated from rents, interest on obligations secured by mortgages, gains from the sale of certain assets, or income attributable to investments in other REITs.

Distribution requirements:

1. Minimum of 90% of REIT taxable income must be distributed to shareholders.

Stock and ownership requirements:

1. Be taxable as a corporation
2. Board of directors or trustees should manage the REIT
3. Fully transferable shares
4. REIT shares must be transferable and must be held by a minimum of 100 persons

REITs that are not listed on an exchange or traded over the counter are generally called private REITs.



Various types of REITs:

Industrial/Office: 
These REITs are further subdivided into those that own industrial, office, or a mix of office and industrial properties. Some analysts further segregate these REITs by property location (i.e., whether they are in CBD or suburban locations). For example, if REITs were to become reality in India, the REIT with focus on Office Space in Gurgaon can result in attractive returns for investors.

Retail:
These REITs are further subdivided into those that own strip centers, regional malls, outlet centers, and free standing retail properties.

Residential: 
These REITs are further subdivided into those that own multifamily apartments and manufactured home communities. Some analysts further segregate those REITs that own student and military housing.

Diversified: 
REITs that own a variety of property types.

Lodging/resorts: 
REITs that primarily own hotels, motels, and resorts.

Health care: 
These REITs specialize in owning hospitals and related health care facilities that are leased back to private health care providers who operate such facilities.

Self storage: 
These REITs specialize in ownership of self storage facilities.

Specialty: 
These REITs specialize in numerous types of properties, including prisons, theaters, golf courses, cellular towers, and timberland. Specialty REITs have been a rapidly evolving segment of the industry.

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What are the various way in which I can raise funds to buy house?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Now that you have decided to buy a home, you need to determine the home affordability and sources of home finance before you actually approach the developer to buy your dream house.

First thing first, what is the value of home that you can afford? Well, home affordability is derived by taking into consideration your current household income levels, and monthly expenditures. Here is the detailed example of calculating home affordability.

Now, the crucial aspect in home buying is sources of funds.

Let’s say, based on your current income levels and monthly expenditure, it is determined that value of home that you can afford is Rs. 6000000

As per banking norms, you can avail 80% of this as home loan from banks or housing finance companies. However, check your loan eligibility from the local bank. Your loan eligibility depends on host of factors such as nature of loan, amount of loan, income of the applicant, financial status of the applicant, his/her age, qualifications, number of dependents, spouse's income, assets, liabilities, stability and continuity of occupation, income, expenditure and savings history.

Home loan = 60 lacs x 80%
                  = Rs. 48 lacs

How do you source the remaining Rs. 12 lacs?

• Cash savings

Firstly, Pool in the cash that you and your spouse may have accumulated over a period of time. Additionally, if possible, you can borrow the money from your close relatives or friends. The benefit of borrowing from family sources is that you will be paying zero or low interest as opposed to borrowing the same amount from commercial lenders.

• Fixed deposits

If your fixed deposits are nearing maturity, unlock them. Or one can also avail loan against fixed deposits. Banks normally lend 70-80% of the total value of fixed deposits.

• Savings in the form of shares or mutual funds

Shares and mutual funds are highly liquid asset class. You can trade your stocks and generate the money that is needed to make the down payment for your home. Some banks also offer loan against these securities. Check with your bank about the eligibility for loan against your stocks or mutual funds. The interest rate charged (10 to 14%) will be in direct proportion to the nature of your stocks and mutual funds.

• Personal loan

This is probably the easiest way of making down payment for your home. If you are employed, approach your company’s bank for personal loan. Your company’s official banking partner will certainly have attractive interest rates schemes for the employees. We have noticed in past when employees were given personal loan at 11-12% as against the market norm of 17-18%.

• Loan against gold

Indians are the largest consumer of Gold. Your gold collections may be lying idle at home or in your bank locker, instead why not unlock the value of gold? It will definitely be handy towards your down payment. Gold is relatively a safe asset class and therefore, banks will charge relatively low interest rate when sanctioning loan against gold. Approach your bank for loan against gold and you will be surprised at ease with which banks will provide you loan against gold.

• Provident funds

Provident funds can also be a reliable source of generating funds towards down payment. One can also avail loan against his/her provident funds.

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Shock absorbers using aerospace technology for making buildings earthquake proof in India

The earthquake tremors of Nepal have not only caused extensive damage to the reinforced concrete multi-story buildings in Kathmandu, but have also shaken the confidence of people in India and ignited the fear of a magnitude 8 or higher earthquake striking North India as per statements made by the National Disaster Management Authority (NDMA).

The prohibitively high repair costs for buildings designed and built as per the building code earthquake standards has prompted Taylor Devices Inc., to launch a unique and one-of-its-kind solution for the Indian realty market. The Indian subsidiary of Taylor Devices Inc., Taylor Devices India Pvt. Ltd., has launched its brand certified earthquake resistance by the name of “Taylor Protected”, which far exceeds the minimum code criteria. Buildings vying for this certification will need to comply with extremely strict and high international standards. These buildings will have giant shock absorbers installed which will stay hidden in walls and these will act just like the shock absorbers in a car absorbing the earthquake shocks so that the building structure remains unharmed.

According to Mr. Sandeep Donald Shah, Managing Director, Taylor Devices India, “India has yet not seen this premier earthquake protection which is extremely popular in countries like US and Japan. These brand certification marks will enable the consumers in India to be rest assured that the apartment they are purchasing contains premier earthquake protection which is much ahead of its times and much higher than the minimum protection as spelt out by the building codes. “It makes great business sense for us to allocate this brand certification as our dampers are built using aerospace technology and come with 35 years warranty.” 

Presently there is no way to identify if a building is earthquake resistant, other than take the word of the seller that the building he is selling is earthquake resistant. Also there are four distinct categories of earthquake resistant buildings – Category A, B C & D - and the difference between their earthquake performances is so huge that merely saying that the building is earthquake resistant has no meaning. Category A and category B buildings stay operational even after a major earthquake whereas category C and category D buildings need to be abandoned/vacated and structurally repaired before being reoccupied.

The building code in India requires a minimum compliance to category D standard, which is “collapse prevention”. “Taylor Protected” and “Taylor Earthquake Protection” brand certification will only be given to Category A and B buildings (Operational and Immediate Occupancy buildings).

To get this state-of-the-art brand certification the building will need to meet numerous stringent earthquake resistant criteria, firstly it would need to be designed to Category B or above seismic performance standard (operational or immediate occupancy) and will have to have Taylor Devices aerospace technology dampers, that are maintenance free and come with a 35 years warranty. 

Proactively divulging the earthquake resistance category of the building will set precedence in upholding the two most important consumer rights on India i.e. “Right to Complete Knowledge” and the “Right to Awareness” which presently is being flouted by one and all in the real estate industry.

This is a press release by Neha Kaushik