How REITs safeguard and benefit their stakeholders?
Real Estate Investment Trusts (REITs) are expected to safeguard and benefit their stakeholders. REITs are for investors.
The real estate industry in India has been going through its share of ups and downs, with many policies and amendments yet to be passed. Dun & Bradstreet’s outlook on the Indian real estate market for the year 2014-2015 reveals that it is one of the most important sectors in the country, indirectly impacting sub-sectors like cement, steel, brick, transport, construction and more. The stakeholders of the real estate industry in India are property owners, property developers, financial institutions, home buyers, investors, landlords, tenants, construction companies, property brokers, laborers and more. Real estate investments contribute to capital formation in other ways. There are other real estate investment vehicles, apart from direct ownership, development or leaseholds. There is no doubt that both the residential and commercial sectors in India have a lot to offer to investors.
With the introduction of REITs, even small investors will be able to use unique and better regulated investment vehicles in order to purchase income-generating real-estate assets. The best part about a REIT is that it provides regular income from real estate assets and even has better exit strategies. Its financing model is similar to that of mutual funds, wherein investors put in their money to invest in real estate instead. When an investor opts for REITs, he or she gets access to a portfolio of real estate investments that is not easy to achieve on his or her own.
The capital that the investor pools into REITs is owned and managed by the trust and the revenue from the same will be shared between all the investors in that portfolio. Apart from transparency and accountability, REITs allow investors to invest in completed real estate assets and pose a less risky option to investing in under-construction properties. They also provide a regular income. As REITs are only now being introduced, wealthy investors will find it easier to invest them, and gradually, other investors may venture into the same.
Ways in which REITs safeguard their stakeholders
- One of the most common problem in real estate investing is that of unaccountability and trust. A lot of people who have invested in plots through real estate companies have been at the receiving end of frauds. REITs are better regulated and managed and you do not have to research and find out in person about properties. Your REIT managers will do all this and more.
- Unlike direct real estate investments, real estate investment vehicles like REITs do not have the extra onus of maintenance, damages and more. There is appreciation in its purest form, much like shares. In other words, there is more liquidity. You can sell your shares and cash out, instead of facing the burden of selling properties that are susceptible to fluctuating prices, maintenance charges, brokerages and more.
- REITs should pay a minimum of 90% of their income as dividend cheques to their investors. This is a huge bonus and safeguards the investor thoroughly. REIT managers cannot cut down dividends to make profits. Whatever their profits are, they should not lower dividends to a level below 90%.
- Despite avoiding the pressures of actual ownership of property, as a REIT investor, you are holding a tangible and physical property. As an investor, this raises your profile’s credibility, as this business is all about returns.
- REITs generate very high yields and this is a boon for dividend investors.
The biggest protection a REIT offers you as an investor is that their real estate values do not tally with stock market prices. You can diversify your portfolio and invest in a variety of properties and prices. You will not face a backlash like you do when you invest in the stock market, as stocks and real estate market trends are related but not mutually inclusive. In other words, if you invest in both stocks and real estate holdings, if there is a problem with one, the other provides the necessary safeguard.
As an individual investor, it is not advisable to invest in multiple properties on your own in another city, for example, due to safety and unaccountability. With REITs, you can do the impossible and invest in many buildings and properties with convenience and safety. Also, by investing in different buildings or properties, you are not planting all your eggs in one basket but are spreading your risks thin.
Taxation, market trends and more
The biggest hurdle with REITs is the lack of clarity with reference to their taxation.
Another issue is that of regulating these investments in the context of the changing real estate market in India. For instance, not all REIT dividends can be eligible for the 15% tax rebate but will be taxed as ordinary income.
REITs are susceptible to the ups and downs of the real estate industry, including factors like interest rate cuts or hikes, GDP, economic factors, income levels, infrastructure, market sentiment, consumer trends, access to formal credit, government policies, regulations and more.
As far as pricing goes, REITs can attract excellent investment opportunities and tangentially ensure more office absorption and less oversupply. There will not be an overvaluation in commercial properties and rental yields are significant. REITs have the potential to create more than 100 million square feet of demand in the office space industry in India. They will also spur the growth of the housing sector by about 10% to 15% and the growth of the retail space segment by 20%.
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