Letting the REIT advantage pass?

For well over three years the real estate industry in the country had been crying hoarse that the regulators have delayed the finalization of norms for setting up Rral Estate Investment Trusts which would help channelize more funds into the market. 

While the authorities completed their exercise well over two months back, the very leaders of the industry are now going easy on taking advantage of the new tool for investment. There appears to be a deliberate ‘Wait and Watch’ policy being adopted. There is one school of opinion which feels that the retail investors as well as major institutional investors in the country are not yet ready for utilizing the opportunity provided by the REITs. One major reason cited is that the investors are not adequately informed of the pros and cons of investing in these trusts. The responsibility for educating the investors lies with SEBI as well as the industry bodies like Credai and FICCI, Assocham etc. Investor advice columns in journals and periodical financial publications would follow suit.

At a time when retail sale of individual home units was slow, the REITs offered a golden opportunity for large investors to make significant investments in the trusts, who in turn could buy and rent out the idle accommodation. Since the country has huge urban housing shortage, rental property would have quick uptake. Reputed builders could constitute such trusts and offer to the would-be tenants the option of converting the rent paid into EMIs for eventual purchase of the property occupied, subject to adjustment of interest rates suitably.

Even as the housing segment of real estate industry was stagnating, commercial properties, particularly ready-built space had remained in good demand. REITs could have been planning and in readiness to invest in such properties quickly, once the regulatory framework was okayed.

Unless and until large investors who subscribe to the REIT corpus show interest in such an instrument of investment, a question of inadequate confidence level will exist for the retail investors. In general, investment in real estate and in REITs is perceived as riskier compared to bonds and other steady but lower yield giving savings. It is therefore naturally expected that returns from REIT investments should be significantly higher compared those safer avenues of investments. This factor is being cited by many as one of the reasons for sow response to forming of real estate investment trusts.  One other area of concern for REIT investors is the tax payable on long term capital appreciation. The new Central government with its investor friendly stance needs to address this issue at an early date. While admitting that this is a genuine area of concern, one may wonder why the investors who stake their capital in riskier avenues do not choose this one. The rental revenue is an assured income, with very little default in payment. As and when the property is sold, there will be most often a significant capital appreciation as well. It would also be necessary to sort out the problems create by conflicting or overlapping legislations and regulations by both Centre and the states.

After examining all these elements, it would appear that the major players in the field are attempting to arm twist the regulators into allowing more favourable terms and less stringent regulations, while they still can. The fate of the REIT facility will be watched with much interest before the other related investment trusts dealing with infrastructure funding (InvITs) can be considered, even though both have been cleared simultaneously.

There is some indication of warming up in this segment. Indian real estate major DHL is reported to be planning buyback of promoters’ interest in their rental properties, and possibly investing the proceeds in real estate investment trust to be formed. If this comes about, there would be a significant move and set in motion a chain of events of similar nature. Such major movements of money from within the sector will not add to the total corpus of funds as of now, but may motivate small investors to gain confidence in REITs and come forward with significant investments. (The minimum required is 5% of the total corpus)