REITS

The market regulator, Securities and Exchange Board of India (SEBI), recently approved the setting up of real estate investment trusts (REITs). On the back of this move, realty stocks are up. BSE Realty index jumped 2% on a day when the Sensex and Nifty benchmarks jumped 0.6%.

Here’s all you need to know about the trust and why it is important for you as an investor:

· What are REITs: REIT is an investment vehicle like a mutual fund, which invests in real estate. However, unlike a mutual fund which would invest in shares of realty companies, REITs would invest directly in real estate assets like office and apartment buildings, shopping centers, hotels and even warehouses. It could also invest in developers for building new projects. Thus, REITs engages in financing the real estate, helping people indirectly invest in commercial or large properties.

 Why REITs are important to investors: Property or real estate is always an animated and exciting conversation. You often talk about property prices in various cities in the country with friends and wish you could benefit from the rise, without having to pump in the lakhs and crores of money required. This will now be possible through Real Estate Investment Trusts (REITs). REITs are also comparatively less risky in comparison with investments in under-construction properties. Investors will benefit from this. They could also help provide a regular secondary source of income, as 90% of the income earned from rent has to be distributed to investors. REITs also provide an avenue for investment in properties that are not easy for an ordinary investor. For example, REITs will allow you to invest in commercial estate like office complex, malls and hospitals etc. which is otherwise unaffordable.

How they work: The idea of a REIT is to provide investors with an opportunity to invest in large-scale and diversified real estate that earns returns in the same way as an investment in other asset classes. A REIT works for an investor like a mutual fund. Just like when investing in mutual funds, you do not have to own stocks, similarly you do not need to own property when investing in REITs. A professional fund manager will pool money from investors and manage it by buying or selling properties on your behalf. You, thus, get the benefit of the market movement in prices through your unit holding. REITs will also be listed and traded on the stock exchange. This helps provide liquidity – something not easily available while investing directly in realty.

·  How developers benefit: For developers, REITs are positive as they could act as a private equity fund or a sponsor to a developer. SEBI has stipulated that investors must put in a minimum of Rs 2,00,000, while the trust should own assets worth at least Rs 500 crore. Assets under management of REITs are expected to touch $20 billion by 2020, according to a media report quoting real estate consultancy Cushman & Wakefield. Of this amount, as much as $12 billion could be raised in the first three to five years, the report added. This will act as an important source of liquidity for the cash-strapped realty sector, which is already teeming with high debt. With interest rates remaining elevated due to high inflation, REITs will be a welcome source of cheaper funding.

· Transparency and accountability: REITs are likely to bring in transparency and accountability in the real estate sector. In 2008, SEBI was hesitant to launch REITs. This was because there were inconsistencies in the valuation of properties in the country. This made it impossible to fairly price properties in which REITs can invest. Now, the regulator has said that an independent party will assess the property value every six months. This will be in addition to the yearly valuation check by two independent valuers. Also, the net asset value of REIT units will be declared at least twice a year. This will ensure transparency and correct valuation of the underlying assets of REITs.