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.

Follow @sach_gupta

Have any Questions? Tweet to @sach_gupta

REITs: SEBI’s Next Move to Revive Indian Realty Market

After a long wait of almost 8 years, the Securities Board of India (SEBI) finally gave a nod for establishing the Real Estate Investment Trust (REITs) in India. Before marking a foray in India, REIT had already made a name for itself in more than 20 countries in different parts of the world. This operating body receives special tax treatment and takes care of the realty projects that comprise, office buildings, commercial and residential buildings, hospitals, shopping malls. There are other realty assets that the organization (trust) takes care of, such as construction of hotels & resorts, multiplexes and warehouses.

However, very few people know the organization has played a pivotal role in helping the Indian real estate grow big like never before. With continued support from REIT, Indian realty market has achieved an enviable stature on a global platform.

Let us have an inside perspective on this:

REIT: The Meaning Explored

Real Estate Investment Trust is actually a trust-like company or organization that operates income-producing real estate assets. The realty projects that are likely to follow on the company’s radar could be residential as well commercial projects; preferably commercial ones the most as they generate employment and income both in a good number. The people who are keenly following the realty market have to halt for a moment and take note of the organization as it is helping the realty market in a big way.

SEBI under its aegis brought REIT on to the main stage to help Indian real estate market come out of the unfortunate liquidity crunch and poor sales figures. The market regulator has jotted down few protocols that the trust company will be following. Here are some of them:

1. Instead of launching any particular realty related schemes, REITs will raise funds through initial offers and will be allowed to raise additional funds through follow-on offers as well.
2. At least 90% value of REITs assets should be incurred in ready properties and the rest 10% can be utilized in other specified assets. 
3. REITs will be quiet far away from vacant and agricultural lands. 
4. The assets held by REIT will have to be valued through physical inspection of properties, at least once a year.

However, one can’t figure out the benefits that the organization has brought in here, merely by reading through the protocols mentioned above. In fact, the figures are analytical in nature and straightaway just can’t understand the good things.

Here’s an inside perspective:

A Sigh of Relief For the Indian Realty Market

The biggest announcement made in the Union Budget 2014-15 brought some respite for the Indian real estate domain. One cannot imagine the potential benefits the REITs can bring in for the domain. Here are some of the advantages:

• Improved Liquidity Situation

The decision to allow listing of the REIT in India will give a positive boost to the liquidity situation of cash-starved developers. These developers have been struggling really hard to fetch funds for their own construction activities. The advent of the trust company has already opened doors for an investment avenue that is fool-proof than under construction properties.

• Indian Realty Market Yearning for REIT

Among major reasons behind India getting actually desperate for REIT was to pull in big time investors. Union budget’s green signal to open up such bodies in the country is expected to bring in globally accepted protocols to the Indian realty market’s funding schemes. Through this, revival of interest of both global and domestic investors is expected.

• Benefit for the Buyers

REIT makes use of investors’ money to purchase real estate assets for the purpose of rentals and capital gains. Through this, buyers will also be benefited by realty price appreciation in preferred areas sans hassles associated with buying and maintaining properties. The buyers will now have seamless ways to pitch in for best residential or commercial realty projects.

• Realty Market Will Now Mature

With stage set to allow fully-fledged REIT to enter India completely, Indian real estate domain is on the verge of getting matured and more productive. The organization will enable flow of more professional investment and management in the domain. Moreover, individual speculation in real estate assets will also be reduced.

• Increased Reliability in Indian Realty Market

There are special benefits that the REIT is expected to bring in the Indian realty market. Advantages like increased accountability & reliability in the sector. The organization’s support to the Indian real estate market will also pull in greater FDI in the sector.

Indian Real Estate Domain On a Roll

There was a time in the growth of the Indian realty market when there was a persistent struggle for alternate avenues of funding. Other than traditional banks and financial institution, permission to launch REIT in India will act as a key launch pad for smoother capital markets inclusion and clean exit options for investors.

Once formally announced by SEBI on the full-fledged operation of the organization, REIT will help the property market in a long way and will also help in reviving global investor sentiments.


This is a guest post by Vineeta Tiwari who is a keen writer on Global Economy and Realty market.