REITs are fast emerging as an attractive investment avenue. REITs stands for Real Estate Investment Trusts. REITs have already gained popularity in markets like the United States and Europe. Currently, more than 20 countries have regulated real estate trust market and the number of such countries is constantly growing. In India, the trusts fall under the jurisdiction of SEBI, which has laid down a number of rules for effectively governing this investment instrument.
The past story
SEBI had long been mulling over REITs regulations. In 2008, the regulatory authority issues draft regulations allowing for the introduction of REITs. These REITs were expected to list their securities on stock exchanges. The regulations also required the trusts to invest 90% of their net asset value in completed rent generating properties in India. The SEBI also proposed that the investment instrument should be made available to only institutional investors or high net worth individuals. This was done to ensure that the markets are properly developed. It was suggested that the retail investors will be given the chance to participate once the market matures. However, owing to various factors including global economic meltdown, the SEBI’s attempt did not succeed and the REITs market failed to take off. The other reason was that the REITs were not allowed to participate in mortgage backed securities.
SEBI once again attempted to revive REITs market by issuing new regulations in 2013. The draft consultation papers contained various strategies to ensure the success and viability of the market. The new guidelines provide the clear cut directions for REITs to invest 90 percent of their REITs asset value in completed rent generating properties. The remaining 10 percent may be invested in other specified avenues such as listed or unlisted debt of the companies, development properties and mortgage backed securities. Such 10 percent may also be parked in the equity capital of the companies generating not less than 75% of their revenue from real estate activities. Apart from this, REITs may also dabble in cash or money market. These steps were taken to ensure that the REITs have the flexibility to manage their operations.
The Opportunity
REITs offer a lucrative opportunity for the investors. However, this is a relatively new investment venue and hence investors should gather as much information as possible before investing their money in this instrument. REITs are high risk and high return instruments and are more suitable for the investors with investment expertise and reasonable risk tolerance capability. REITs have many benefits such as giving an opportunity to the investors to participate in the real estate market without tying up huge amount of funds in buying actual piece of land or property.
First of all, the investors need to understand how the REITs differ from other real estate funds. Investors can directly purchase residential or commercial properties in order to benefit from the real estate boom. However, this type of investment generally requires big capital outlay and thus is out of reach for most of the investors. Apart from this, the process of acquiring real estate is lengthy and requires huge amount of paper work to be done. All these obstacles make this option unattractive for retail investors. Also most of the investors are not expert in the nuances of the real estate market and thus run the risk of losing their investment.
Investors may choose to invest with traditional real estate funds. However, these funds usually focus on capital appreciation. Thus, these funds are not suitable for investors who look for short or medium term investment opportunity. These funds are also not suitable for the investors desiring regular income in the form of dividend payments. Traditional real estate funds also do not provide desired liquidity to the retail investors. With these characteristics, traditional funds are more geared towards high net worth individuals.
Traditional Real estate funds also have high investment thresholds. Many of these funds require minimum investment corpus of Rs. 25 lakhs, which is out of reach for most of the retail investors. REITs on the other hand have much lower requirement, making them accessible to a larger universe of retail investors. Lower threshold also makes it possible for the retail investors to diversify their risk profile.
REITs invest in revenue generating properties and depending on the design of the scheme, offer steady stream of dividend payments. Further, SEBI also tightly regulates these instruments to ensure that the interests of the regular retail investors are not ignored. With REITs, the investors can get expert advice at relatively lower costs as these funds are managed by highly qualified and experienced managers. This ensures that the funds make informed decisions for the benefit of its investors. Despite these advantages, the funds are still prone to regular market risks such as volatility and non-payment of the rental amounts. The investor should carefully read the documents before investing money with the REITs.
