Can REITs Bring Order to Realty Chaos in India?

The recently introduced Real Estate Regulatory Act or RERA has a mandate to bring about the much-needed transparency and accountability in India’s massive realty domain. The added transparency is also expected to boost the real estate industry’s stock as a credible investment domain and improve liquidity.

According to industry experts much of this potential investment will be driven by structured funds including private equity vehicles and Real Estate Investment Trusts (REITs).

First introduced in the 1960s in the US, REITs can be defined as pooled investment trusts that invest in completed realty assets, manage them and distribute a major portion of the earnings to their investors.

Across the world, they have demonstrated the ability to attract and efficiently manage realty investments and ensure increased transparency in real estate by adopting better corporate governance.

In addition to becoming an attractive investment option for non-residents, REITs in India are also expected to provide the common man an opportunity to invest in fixed income securities providing long-term capital appreciation.

Given the limited investment opportunities thus far, savings were usually invested in traditional avenues like gold and real estate, which can be unproductive assets. The introduction of REITs is expected to provide investors with a new investment avenue that is more productive and also allow smaller investors the opportunity to convert their funds into a productive asset class.

By virtue of being pure equity capital, REITs can also help liquidity-starved developers to improve their debt-equity balance while assisting in the growth of a stable, mature realty market. REITs can also provide developers access to institutional capital in case they wish to sell their assets to generate cash for new development or reduce their debt.

For their part, banks can also play a major role in the spread of REITs in India. Typically they are known to own prime plots across cities that host their branches and other offices. These can be revalued & converted into a REIT, with the asset being leased to the banks. Not only can this help them to add value to their balance sheets but also ensure a stable asset for their investors.

Present trends indicate that the global capital allocation towards REITs is rising rapidly. This in turn can be routed into the country and with India’s tax system favoring NRIs the end result could be a win-win for both.

Clearly REITs have the potential to streamline India’s often chaotic real estate sector by instituting a system to raise funds in the realty market in a transparent manner, instilling the much-needed confidence in the minds of both domestic and global investors.

The realty industry’s acute need for funds and the huge success of REITs in other global markets has ensured their implementation in India. The government has also made its intentions clear by ensuring the setting up of a complementary framework and tweaking the tax regime to accommodate this new investment avenue.

The only thing that remains to be done now is to ensure the quality of assets being introduced in the initial REITs and make sure only strong, mature, high quality assets make the REIT cut going forward.