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India’s first Real Estate Investment Trust (REIT) could be a reality soon, enabling people to invest in real estate assets just they way they invest in mutual funds. Embassy Office Parks, which is a joint venture company of Embassy Group of India and America’s Blackstone Group, has filed draft offer documents for its REIT with the Securities and Exchange Board of India (SEBI).
You are reading: India’s First REIT To Offer New Option to Retail Investors
A REIT is much a like a Mutual Fund in which people pool in their money or funds with a real estate building or project as the underlying asset that will earn money, or returns, for the investors. As with the case of Mutual Funds, REITs will be made available to the investors in demat format that will be overseen by SEBI.
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While REITs are fairly common in the western world and have been offering an alternative investment option to the people in many countries, it is a fairly new concept in India. Only a few years ago, REITs have been envisaged to the brought into our financial system, primarily with the aim of enabling real estate companies to generate funds from the market and for people to get more structured returns on their investment. As the regulation currently stands in India, REITs has the following features:
Retail investors and REITs
A retail investor can make an investment of a minimum of Rs 2 lakh, as per the current rules set by SEBI. Once a REIT is listed on stock exchanges like BSE, NSE, etc, investors can trade with a minimum lot of Rs 1 lakh.
Underlying Asset and Earnings Thereon
The SEBI, through Real Estate Investment Trusts Regulations-2014, mandates that a REIT must invest only in commercial realty assets. The investment can be made directly or by way of special purpose vehicle. For the developer, rental income is earned by leasing the commercial property or properties. In the REIT system, such income goes to the special purpose vehicle or to a trust. Through a REIT Fund, real estate developers can generate resources for further construction, apart from earning income for the investors who buy units of the REIT Fund.
How A REIT Can Invest Funds
SEBI has clearly laid down the rules for the investment and underlying assets of a REIT. SEBI mandates that a minimum of 80 percent of the value of a REIT asset must be in a completed commercial project or projects. The project or projects must be generating revenues, ie, rentals. The rest of the 20 percent can be invested in under construction properties, securities that are mortgage-backed. The rest of the 20 percent can also be invested in equity shares of firms that are deriving not less than 75 percent of their operating earnings from real estate activity.
Income earned Through a REIT Fund
The income that a REIT can earn is either through rentals of the commercial property which is the underlying asset of the REIT Fund or by the capital gains accrued by the sale of part of the property or both. This money gets distributed to investors or the unit holders. As the current rules set by SEBI, not less than 90 percent of the total distributable cash flows must be distributed to investors at least on a half-yearly basis.
Returns For An Investor
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While the first REIT of India is just being launched, it remains to be seen how much will be the earnings for a REIT and consequently how much would be the returns for the unit holder or the investor. But many property experts say that the returns for the investor could be around 7-8 percent. Since the underlying asset is a commercial property in the case of REIT Fund, the overall income also depends on how well the property is managed and the leased out. A property which is very well maintained and managed can give 8-10 percent returns also. In the West where REITs are already popular, the income largely ranges in between 5-10 percent.
Taxation
The Union Budget of 2015 gave ‘Pass-Through’ status to rental income that is arising to a REIT from the real estate property held by it. In 2016, government came out with a sop by way of eliminating the need of payment of Divided Distribution Tax on sums paid to REITs by investors. However, the returns earned by an investor by way of income distributed by a REIT, it will be considered as ‘income’ of the investor and will be taxable as per the Income tax bracket that the investors fall in.
The REIT will mark a paradigm shift in investment scenario in the country, especially by retail investors, in an illiquid asset like real estate. The Embassy Office Parks REIT will pave the way for valuation of other REITs and their underlying realty assets in the country. The REITs by Embassy Office Parks will also set the tone for listing of other REITs on stock exchanges.
REIT acquisitions touched 10 billion US Dollars in the first six months of 2018 and accounted for about 17 percent of the total share in the investment volumes in Asia, according to a CBRE- CII Report Challenges to Opportunities. In the year 2017, acquisitions by REITs in Asia-PAC region crossed 20 billion US Dollars, with about 15 percent share in the total commercial real estate acquisitions undertaken in the region.
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