REITs: 4 Pillars for efficient functioning

In October 2013, SEBI released an advisory memorandum for introducing REITs in India and left the suggestion in the public domain for discussion. Within no time, we saw the stalwarts of the industry debating on the television screens inundating the target audience with hefty arguments and viewpoints. However, this debate actually never reached a conclusion, until the Finance Minister proposed ‘tax pass through’ status for Real Estate Investment Trusts in the Union Budget for the current fiscal.

With finally getting a green signal from India’s financial regulator to introduce REITs, the issue has suddenly been reanimated into prominence.

A lot has been already said and written about REITs and how it will impact the Indian realty market. Also, CommonFloor in its detailed analysis of the Union Budget 2014 (Titled ‘Real Impact of Union Budget 2014’, published on Jul 11, 2014) had already analysed some aspects of the topic in question.

It is no hidden truth that introduction of REITs will benefit only companies with good number of commercial assets. As there will be more liquid income in the market, the prevailing debt situation will also reduce significantly. The other much talked about benefit is that as these investment trusts target only completed properties with clear title, it will lead to faster completion of projects. All these, undoubtedly, will directly help the economy to get back on the track.

It has been often said and reported in several media that REITs could be a potential game changer for the realty sector. Though there has been a clarity on the regulation part, several factors that play a crucial role in the success of this have been totally ignored. Thus, CommonFloor has tried to analyse certain factors that will impact the investment trusts in India directly.

Factors Impacting REITs

*To begin with, there is no proper classification of properties in Indian market. As of now, REITs is only there in commercial (office space) and retail sector. Further, there is no classification for other property types such as healthcare, hospitality, etc. Since REITs is only targeting commercial assets, due to lack of standardisation of property type, it will be difficult for the efficient functioning in a country like India.

*Talking of REITs in US, where it has been successfully implemented, there are about three valuation models for the efficient audits and sales. However, India at present lacks up-to-date valuation models. In absence of such models, currently it is only based on personalised expertise, which at times may be faulty or biased due to vested interests.

*Thirdly, every state in India is governed by its own set of rules and regulations for taxes and stamp duty. Obtaining land with clear title in India is a difficult task. Thus, this could also be a major hindrance for REITs. All these legal issues can be detrimental for the coherent functioning of REITs in India.

*The reason why REITs has been successful in US is mainly because of the expertise in asset and portfolio management. India, however, lacks such expertise. This can solely be attributed to the so-called low-perceived image of real estate in our country.

Since time immemorial buying a property is the most common form of investment in India, still it does not hold a status at par with shares or gold. Today, every Indian state, city or for that matter even far flung villages are dotted with engineering and medical colleges. However, real estate institutes are like stones in a plate of rice. Thus, this tabooed status, which takes on the form of moral sanction has to change. What we need is a systemic shift in the society, wherein Real Estate is looked at not just as brokerage but as an important brick for country’s economy.

All said and done, if the government wants REITs to be successful in India, the above mentioned four points should be considered with utmost seriousness.

Expert View

“With the stamp of approval by SEBI, REITs are finally a formalized concept. This is a big change from the ambiguity and uncertainty that prevailed about this very important instrument in previous years. It is gratifying to note that SEBI fully intends to deliver on its assurances of bringing better and faster funding into Indian real estate.

As the drafts for REITs stands now, further clarity about taxation eligibility norms is definitely required, and will doubtlessly come before the first listing goes up. When this happens, there will be vastly increased interest from foreign investors.

Currently, Grade A office space in the top seven cities of India amounts to around 376 million square feet, and we anticipate that approximately 50 per cent of this space will get listed in next 2–3 years. The valuation of these assets is around $10-12 billion, and this accounts for a fairly massive influx of funding waiting in the wings to hit the Indian real estate market via REITs over the next few years,” says Anuj Puri, Chairman & Country Head, JLL India.

Below are the key highlights of the recent announcement.

Read More:

SEBI: New norms to help entities take REIT exposure with minimum Rs 2 lakh

Huge amount of funds might flow into REITs

REITs: New investment option for the real estate investors

SEBI announces REIT, InvIT regulations

Real Estate Industry waiting with bated breath to see the outcome of REITs