Real Estate Investment Trust (REIT) has come calling on the Indian realty segment

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)
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    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.