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Tuesday, October 29, 2013

What is Real Estate Investment Trusts (REITs) ?

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Sebi will permit real estate funds soon. They could be a step towards reforming the sector

 

After a hiatus of five years, investments regulator SEBI has again proposed to allow Real Estate Investment Trusts (REITs) in India. These are roughly like mutual funds which invest in real estate. On the face of it, REITs should prove to be extremely popular in India because Indians are far more enthusiastic about real estate than financial investments and something that converts real estate into a financial investment would be just what the doctor ordered. However, in the form that Sebi is permitting it, REITs are a somewhat different animal. These funds will be permitted to invest only in projects that are finished, which eliminates the stage in which real estate projects realise the most capital gains.

 

The idea is to have a way by which investors can combine and buy rent-generating properties which will yield a steady income for long periods of time. REITs will be closed-end funds with tradeable units. Of course, this doesn't mean that REITs will not add to the supply of fresh, developmental capital available to the real estate industry. Money is fungible and REITs will provide an exit for developers so that they can take the freed up resources and deploy them in other projects.

 

In a smoothly functioning real estate sector, developers develop projects and quickly exit them by selling to REITs. REITs pool the resources of end-investors, generating income from rent and capital gains from selling to end-users. The risk capital needed to transform a patch of ground to a ready project must still come from the developer, or by those funding the developer through conventional routes. For the investor, REITs mean that real estate investments can be made easily without having to buy actual property. This is not just like the transition from buying stocks to investing in a mutual fund. Instead, it's like buying a mutual fund instead of running a business.

 

That's the idea but of course at the ground level the reality of Indian real estate is quite different and for the most part, quite unsavoury. Hopefully, REITs will be a step in cleaning up the sector.

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