REIT as a vehicle for Real Estate investment

In my last post I had discussed the prospects of real estate as an investment option. Real Estate Mutual Funds also known as Real Estate Investment trusts (REITs), offer an alternate investment option in Realty market. According to global consultancy firm KPMG 'Indian real estate sector is currently facing strong headwind due to the credit turmoil and rising inflation. REITs should help ease the situation and compensate to some degree the relative absence of public equity and challenging debt markets'.

What is a REIT?

• An entity which pools in money and invests in real estate
• Provide a similar structure for investment in real estate
  as mutual funds provide for investment in stocks
• Can be publicly or privately held
• Generally listed on exchange
• Assets of the trust are managed by a Fund Manager
• Provide taxation benefit to investors
• Pass through available in some countries like USA if
  specified conditions are met.
  

REMFs are ideally suited for investors who are keen on investing in real estate but lack the technical knowledge or resources for such investment. Moreover, real estate market in India lacks proper regulation and is guided my rampant speculation. SEBI has come up with a draft proposal for launch of REITs in India. When approved, it will be known as SEBI REIT regulations 2008. This will have two main objectives:

• Help meet the capital needs of the Real Estate sector,
• Allow small investors to participate in the Real Estate growth.

The salient features of the SEBI draft guidelines are:

• The trust and management company must have a net worth of minmum Rs. 5 crores
• All schemes offered bt REITs will be closed ended and will be compulsorily listed.
• The net asset value (NAV) of the schemes will be disclosed yearly based on the valuation report prepared by the principal valuer.
• The scheme will invest only in viable real estate, the contract value of uncompleted projects should not be more than 20% of NAV.
• Investment in vacant land is not permitted.
• A trust shall not have an exposure of more than 15% of any single real estate project, and not more than 25% in all real estate projects developed, marketed, owned by a group of companies.

The launch of such trusts/funds is taking time because of the shortage of professionals especially in the valuation of real estate. Effective valuation of each underlying property has to be extremely clear, before the decks are cleared for launch of REITs in India. Whever such an opportunity arises REITs will form an attractive option for retail investors to invest in Real Estate.