Economy Updates – Sep-2014

Real Estate Investment Trusts (REITs)

  • Finance Minister Arun Jaitley, while presenting the budget for 2014-2015, said that Real Estate Investment Trusts (REITs) would soon be allowed.
  • SEBI has already announced draft regulations for REITs and is also expected to issue final guidelines in few weeks.
  • India is gearing up for a new concept called REITs.

Origin of REITs

  • The concept Real estate investment trusts (REITs) was originated in the USA in 1960s.
  • REITs were created by US Congress to give all individuals the opportunity to benefit from investing in income-producing real estate.
  • The stockholders of a REIT earn a share of the income produced through real estate investment, without actually having to go out and buy or finance a property.
  • The concept of REITs has quickly spread across the world and in many countries REIT legislation has been adopted.

What is REITs?

  • Real Estate Investment Trusts are a special type of investment vehicle which operate more like mutual funds but invest in real estate properties for returns.
  • These properties are usually income generating properties, commercial or residential, and the returns from such investment are passed on to the investors in the REITs.
  • Usually REITs’ units, issued by fund houses, are traded on the stock exchanges and investors can buy and sell those units like stocks.
  • In India, market regulator is in the process of formulating rules for launching REITs in India.

Types of REITs

There are internationally three types of REITS:

  • Equity REITs: Equity REITs invest in and own properties ( thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties rents.
  • Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgage. Their revenues are generated primarily by the interest that they earn on the mortgage loans.
  • Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages. REITs in India will be SEBI Draft Regulations for REITs
    • At least 90% of the value of the REIT assets shall be in completed revenue generating properties.
    • To distribute at least 90% of the net distributable income after tax of the REIT to the investors.
    • REIT shall invest only in assets based in India.
    • Investment shall not be allowed to be made by REIT in vacant land or agricultural land or mortgages other than mortgage backed securities.
    • Investment up to 100% of the corpus of the REIT has been permitted in one project subject to the condition that minimum size of such asset is not less than Rs. 1000 crore.
    • The funds may be raised by REIT from resident or foreign investor. However, the draft regulations proposed that till the time the market develops, REITs may be offered only to HNLs/Institutions. Further, minimum subscription size shall be Rs. 2 lakhs and unit size shall be Rs. 1 lakh.

Benefits of REITs

  • REITs offers investors an option to include real estate in their investment portfolio.
  • In several of the developed markets, REITs are one of the most liquid investment products for investing in the real estate sector.
  • An investor can invest even with a relatively low sum of money rather than investing huge sum directly in real estate.

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