Investors in India have always enjoyed a fancy towards investment in Real estate and Gold. And they have been richly rewarded over the past decade in terms of handsome capital appreciation from both these asset classes. The inclination of the investors towards investment in 'Real Assets' over 'Financial Assets' has resulted in dwindling of retail share in Stocks and Bonds over the years. However, with the revival of sentiment led by the formation of a stable Govt. at the centre, retail investors are once again flocking the equity markets. It is a consensus amongst analysts that India has entered a multi year 'Bull run' for equity markets, and returns from investment in Gold and Real estate may not match the equity returns in the next 5 years at least.
Although real estate continues to be a major diversification/ hedging tool, the phenomenal rise in real estate prices over the past decade has pushed this investment out of the reach of the common investor. To bridge this gap REITs (Real Estate Investment Trusts) are finally taking shape with the announcement of norms governing REITs by SEBI last week. REITS are one of the most important vehicle for making collective investment in Commercial Real Estate. Originated in USA in the 1960s as a tax transparent investment opportunity, REITs have made their entry in most developed countries and have done remarkably well. REITs legislation exists in 37 countries apart from India and the combined investment is close to US Dollar 100 billion.
REITs legislation in India will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net-worth individuals. All REIT schemes, to begin with, will be close-ended real estate investment schemes that will invest in property with the aim of providing returns to unit holders.The returns will be derived mainly from rental income or capital gains from real estate. REITs will be allowed to invest in commercial real estate assets, either directly or through special purpose vehicles (SPVs). According to SEBI guidelines a REIT will be required to have assets worth at least Rs.500 cr. at the time of an initial offer and the minimum issue size has to be Rs.250 cr. The minimum subscription size for units of a REIT on offer will be Rs.2 lakh and at least 25% of the units have to be offered to the public. Subsequently, REITs can raise money through follow-on offers, rights issues or qualified institutional placements and the trading lot for such units will be Rs.1 lakh. To ensure that REITs generate continuous returns, SEBI norms stipulate that at least 80% of the REIT’s assets have to be invested in completed and revenue generating properties. SEBI board also approved the launch of InvITs (Infrastructure Investment Trusts), which are somewhat similar to REITs. These REITs will be listed on Stock exchanges and would be traded based on their NAVs.
We may see the launch of a few REITs in India by the end of this fiscal. Embassy Property Developers, which is planning a $2 billion REIT with global private equity firm Blackstone Group, is planning to list it in India sometime next year. Investors may gear up for this Real estate investment opportunity with a minimum investment of Rs.2 lacs and reap the benefits of real estate appreciation, with complete transparency and adequate liquidity.
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