REIT: SEBI'S ENDEAVOUR TO INFUSE LIQUIDITY INTO THE SECTOR
SEBI's
recent move to revive the popular real estate funding model has been
hailed by many. However, its viability needs to be examined, says RAVI
SINHA
The
Real Estate Investment Trust (REIT) has come calling on the Indian
realty segment for quite some time. This globally successful model of
real estate funding that gives retail investors an avenue to invest in
the sector, without buying physical properties, was put on the
back-burner last time with the premise that Indian real estate lacks
research-based structured depth and maturity. Much water has flown under
the bridge since then and while it is debatable how much the sector has
gained in terms of structured research, it seems that desperate times
have highlighted REIT as a desperate solution, which all stakeholders,
within the built environment, are considering a saviour.
Stock
market regulator, Securities and Exchange Board of India (SEBI), is all
set to resurrect the proposed REIT, notwithstanding its two earlier
unsuccessful attempts. This time, it will be unveiled on the Alternative
Investment Fund (AIF) platform. The key for the revival of REIT is to
curb the 'mad rush' by Indian investors, to buy gold and replicate the
success stories in real estate listings in Singapore. Financial services
company, Macquarie Group, believes that unprecedented weakness in the
rupee and the government's attempt to attract foreign capital, are the
main reasons for SEBI to once again consider REIT. It could also provide
a new lease of life to the cash-strapped commercial real estate
segment.
SEBI plans to create a new category on the AIF
platform, enabling investors to subscribe to units of REIT. These units,
very much like those of mutual funds, will be listed/unlisted and will
invest in rent-income-based real estate assets. Importantly, the
regulator is proposing that 90 per cent of the income from REITs, be
distributed as dividends every year, which is in line with the
international practice. The REIT is a single company or a group that
owns and manages real estate properties on behalf of investors, much
like the concept of shareholding in a company. The AIF is established or
incorporated in India in the form of a trust or a company that collects
funds from investors. Sources within SEBI maintain that the features of
REIT are being fine-tuned. The consensus
is slowly emerging as to who can invest in these investment vehicles
and the minimum subscription criterion is being set. The regulator plans
to roll out the regime before the 2014 general elections. The REIT
model has already been successful in many countries such as Singapore,
Japan, Australia, the UK and the US. However, it will need a number of
approvals, including one from the ministry of finance and the department
of industrial policy and promotion. To begin with, investments in REIT
will be restricted to institutions and High Networth Individuals. They
may be thrown open to retail investors after three years.
SEBI
had formulated the draft regulations for the REIT regime in 2007 but it
was never implemented. Subsequently, the regulator decided to roll it
out on the mutual funds platform but that too did not take off, owing to
a different set of requirements for retail investors. The realty sector
has welcomed SEBI's recent move. Ramesh Sanka, group CFO, DLF, says
that whether it is the Asia Pacific Real Estate Association (APREA),
other people or big fund investors, they are already in dialogue with
the government at both, the finance ministry level and at the SEBI
level. Both the bodies are showing positive interest in this concept
because they
find that this is the only way two things can happen. One, a small
investor in the market can participate in real estate transactions.
Second, this is the only way that foreign investors or FDI can be
revived in this sector. "If we were to compare with Singapore’s rate
model, income tax is not applicable there in properties but here, we
will be subjected to income tax, whether it is IT SEZ or other
commercial property. The second most important thing that we have to
understand is that when you start distributing the extra money that you
have, dividend distribution tax comes into place. REIT is one model
which assumes that this dividend distribution will not be taxed, either
in the company's hands or in the recipient hands. I think that is where
the government needs to focus. Everybody is requesting the government to
find out a mechanism where both these can be exempted," adds Sanka.
Lalit
Kumar Jain, chairman of developers' body CREDAI, hopes that in light of
the country's rupee v/s dollar crisis, a workable REIT structure will
be put in place at the earliest, whereby, the sector can invite foreign
investment into REITs. "We in India, don’t focus on lessons learnt
globally. This results in the failure of instruments like REITs. Every
industry has its own identical needs
and we need to learn a lot to devise a practical form of mutual funds
in real estate. Engaging the industry is also very important in the
decision making process," opines Jain.
Diipesh Bhagtani,
executive director of Jaycee Homes, feels that in its previous attempt
in 2008, SEBI had to postpone its initiative because of the global
economic meltdown. This time around, SEBI is attempting to make the
investment more viable for the investors. However, the concern on the
regulations, transparency, feasibility, etc., makes the decision taking
process complex for the regulator. "It is a muchneeded step for growth
in the real estate industry. It is expected to bring transparency on the
financial side of the sector. REIT in India's structure, is similar to
what exists in the US. SEBI had initiated the first discussion in
2006-07; however, owing to a different set of requirements for retail
investors, it had to hold back its plans. The new proposed category is
different from what was previously planned. According to the new draft,
investors will be able to invest directly in real estate assets through
REIT," informs Bhagtani.
Maintaining that this is a good
initiative by SEBI, analysts in the financial market say that the
earlier guidelines were unworkable and hence, no effective development
of REIT happened in India over the last few years. According to them,
realistic and practical regulations can go a long way in rejuvenating
the REIT market in India. After all, mutual funds invest in relatively
liquid assets compared to REIT. By definition, REIT invests in real
estate and is for a much longer duration.
Sudip Bandyopadhyay,
MD and CEO, Destimoney, believes that there were two sets of guidelines
issued by the regulator, covering REIT. SEBI issued the draft REIT
regulations in 2008. Another set of guidelines for real estate mutual
funds were issued in 2008. The confusion arises from the fact that both
these guidelines are supposed to regulate a similar product. In the
absence of REIT guidelines, some real estate developers have already
listed their REIT overseas. The clarity pertaining to double taxation is
also required. "We expect the new guidelines to take care of all these issues
and create an enabling environment. Uncertainties in the real estate
business, have also hindered the creation of REITs. An enabling
environment will propel the real estate market to adopt global best
practices and clean up its act. In light of the dwindling interest of
investors to put money in Indian real estate, the existence of the REIT
structure is extremely important. Institutional finance to this sector
has witnessed a remarkable slowdown due to increased risk perception.
Similarly, foreign investment has also witnessed a downtrend. The IPO
market has also dried up for real estate companies," adds Bandyopadhyay.
There is no denying that there is huge unmet demand for housing in
India. This, combined with other factors, must have galvanised SEBI into
action. Clear, transparent and market friendly regulations can
rejuvenate this sector and solve the liquidity crisis. Would the roads
be smooth ahead? Experience suggests otherwise, as even Real Estate
Mutual Funds (REMFs) - India's tentative answer to the international
REIT model, adapted to the existing Indian mutual funds platform, failed
to offer the right answer. Post SEBI's move, while everybody is working
on entry and creating assets, the important question of who will buy
these assets to provide an exit to the developers/investors, needs to be
addressed. Shobhit Agarwal, managing director-capital markets, Jones
Lang LaSalle India, elaborates, "The leveraging allowed in the case of
Indian REIT is the lowest (at 20 per cent of the value) compared to 35
per cent in case of Malaysia, Hong Kong, Singapore and Taiwan and 200
per cent in case of Korea. This could result in a lower yield and
because it is not really leveraged, the risk factor is also higher. Such
risk, coupled with a lack in transparency in the system and a high
amount of friction in approval mechanisms, creates uncertainty in
yields. This uncertainty of the quantum and time of returns, is the
reason why most foreign investors are shying away from the Indian real
estate sector currently. How far will REIT change this? That only time
will answer.
(The writer is CEO, Track2Realty)
QUICK
BYTE
REIT
IS A GLOBALLY SUCCESSFUL MODEL OF REAL ESTATE FUNDING THAT GIVES RETAIL
INVESTORS AN AVENUE TO INVEST IN THE SECTOR WITHOUT BUYING PHYSICAL
PROPERTIES. IT WAS PUT ON THE BACK BURNER IN 2008 WITH THE PREMISE THAT
INDIAN REAL ESTATE LACKS RESEARCHBASED STRUCTURED DEPTH AND MATURITY.
