Will the REIT give a boost to the real estate sector?
What is an REIT?
REIT is a special investment trust or a company that invests money procured from different investors directly in real estate either through the properties or by way of mortgages. The investors receive the income from the rent of the properties and as well as the capital gains of the properties when they are sold out.
The REIT ensure fair amount of transparency as investors know what is being bought including the current value of the properties being purchased. Thus the investors have a realistic expectation of income from the investment done. The REITs offer accessibility to invest in real estate for the investors for whom it is difficult to purchase real estate for investment purposes. SEBI has already passed the draft of the regulations that will start functioning once it’s passed.
How will it work?
As per the experts and the practices prevailing in other countries the new instrument has a potential of attracting about USD 8 to 10 billion in the real estate industry. The REITs would pool the money from investors and issue units in return like the stocks. The money so collected would be invested mostly in the commercial properties which are ready and would generate income.
The proposed SEBI regulations would help enable the listing and trading of the REITs just like any other securities on the stock exchange and also would help create newer avenues of raising funds by the real estate companies.
The role of SEBI
The guidelines prepared by the SEBI would fix the minimum requirements for asset sizes to be listed in the SEBI board in India which is Rs. 500 crore. This limit was Rs. 1000 crore earlier. The SEBI is preparing the norms of the REIT investment with an aim to attract more foreign as well as domestic investments. SEBI would soon notify norms for creation and listing of business trusts for this key sector. The sources from the SEBI said that two separate committees have been set up for the specific guidelines on this issue.
The REITs and the Infrastructure Investment Funds (InvIT) – which is often together referred to as the Business Trusts (BT) were earlier recognized by the UPA government as the critical tools to raise funds and resources for infrastructure and to strengthen the real estate sector. These would also help the developers to ease their pressure on the borrowed capital and release the necessary capital for their new constructions of buildings and infrastructure. The business trusts would most likely ease the Non-Performing Assets (NPAs) of the banks and financial institutions and would also provide a new and alternative investment option in the financial market pumping in more liquidity.
The prospects of Business Trust in India
According to the draft and the proposed regulations of the SEBI it is mandatory to distribute at least 90 percent of the surplus. Thus the experts feel that the tax authorities should treat the BTs on a different footing altogether and shouldn’t compare it with other infrastructure projects like the SEZ.
The financial experts feel that India needs the REIT and InvITs which is collectively called the BTs for more liquidity which is blocked in the infrastructure development and the completed projects so that it becomes easier especially for the bengaluru developers and builders to reinvest in newer projects by transferring the already ready and developed projects to BT. The experts argue that the capital so released and the further investment in the real estate sector would generate more revenue and hence more tax revenue as well. So the government with all its departments should encourage the development of BTs and should strive to make BT a success in India.