REITS ARE READY TO TAKE OFF?

Image Credit: www.nyu.edu

 There has been much excitement about the future of real estate investment trusts (REITs) in India on the back of two interesting developments recently. 


The first was a regulatory change where SEBI allowed REITs to invest up to 20 per cent of their corpus in projects which are under construction. The second was the policy change which now allows REIT investment into educational institutions.

For the realty industry which has been cash strapped for some time now, this is great news. Several companies could use this route to unlock the value in their educational ventures and that is why policymakers should be closely watching the developments.

India is now waking up to REITs, which is an established mode of investment for institutional as well as retail investors for the real estate sector.

REITs have emerged as a tax efficient way to unlock value for real estate companies. Developers invest huge sums in acquiring land, stay invested to build the property as a commercial, healthcare or educational venture which gives a healthy annual return. With REIT funds for educational projects now a reality, realtors have one more option to unlock value for the assets that they own.

REIT is an investment vehicle that parks money in realty projects that have been completed, hence earning rent for the investors. Since it has annuity income, it is referred to as one of the policy measures that can, potentially, transform the Indian real estate sector. At a time when realty returns are negligible, REITs for educational institutions can be a boon for the industry.

SEBI’s regulation has, after careful consideration, decided to keep REITs confined to high net worth individuals. Its conditions impose enough checks and balances on the functioning of REIT to ensure there is transparency in their operation and that the interests of the investors are protected. SEBI’s regulation, debated and discussed at length as it evolved from the beginning of the decade, seem to be a little out of sync with reality.

The recent decision to remove dividend distribution tax and allowing REITs to invest 20 per cent of its investments in projects under construction are welcome. It confirms that the policymakers are in the right direction to make sure REITs can take off. A more aggressive nudge by the policymakers and regulator would help realty companies out of the tight liquidity they find themselves in.

If implemented in the right earnest, these changes have the potential to unlock value for shareholders and assets that these companies are saddled with. Since India’s market regulator does not allow retail investors to invest in REITs, it will not be possible for them to be part of the wealth creation under the REIT model.

But global experience shows that several REITs are also listed at select exchanges, which gives an opportunity to study their performance based to returns given to the markets. Five year returns between 12-24 per cent for REIT funds have been seen in different markets. Japanese and Malaysian markets have been found to have returned 7-12 per cent returns.

For the Indian markets, REITs will be governed by guidelines of the market regulator, Securities & Exchange Board of India (SEBI). It will have to comply with the need for an independent trustee, auditor and others.

Several global funds are looking for better returns and have been eyeing emerging economies to park their funds. India’s strong growth, led by domestic consumption, could be just the right opportunity for these funds. For realty companies, it would mean institutional investors buying a part or entire stake into their projects for annualised returns. That liquidity and unlocking of value could be critical for fuelling further growth for the realty companies.

Creating the win-win situation that could marry the needs of policymakers looking to drive growth further, investors seeking better returns and realty companies who could unlock value hidden in their assets could just be music for India’s growth story.

If there was a perfect opportunity for investors to put in money in India’s commercial real estate and exit after a good return, nothing could be more perfect than REITs.

Will the Warehousing & Leasing Segment be the Saviour for Realty?

Suddenly, everything seems to be pointing to a potential surge in Real Estate sector. Monsoon, FDI, GST, REIT, 9th Pay Commission, ... everything seems to be only pointing to an unprecedented growth in realty. 

And what a change it highlights: From a situation of "nothing is right" for the sector as of Yesterday to Today's "everything is bright and sunny", the change in perception is quite drastic.

And if these are perceptions, so what is the reality? Quite the middling path actually. Things weren't as bad yesterday and aren't as sunny as today.

For quite some time now, the real estate sector has been looking for a lifeline. The downturn, lack of funds, Issues with overcapacity and under sales in the erstwhile growth-hubs, as well as falling prices have left the sector gasping for breath. It is a sad situation for the industry which once was touted as the sunrise sector along with education.

So will all the above inputs really impact the real estate sector’s fortunes in the immediate term? Not really!

Image Credits: www.synchronised.in

Yes the growth will come from FDI, REITs and others, but only in the longer term.

Surprisingly, the sector, which has mostly been judged by the volumes in the residential segment, is suddenly getting a boost now from a surprising quarter: Warehousing and Logistics(W&L) segment. The numbers that have been forthcoming in this segment are staggering and have the potential to really spur the Realty sector. 

I'd like to believe that the real triggers for growth for W&L segment are the Government programs like "Make in India" and "Infrastructure Development projects", but in reality I see not enough traction from these segments as yet on the ground level.

Surprisingly, the catalysts are from two "unlikely" segments - Retail(or e-Retail, to be precise) and the recent GST announcements.GST is spelt as the real game-changer for the W&L segment with the biggies in the segment already talking about expanding capacities. Both of these combined by the impetus provided by Railways which is talking about humongous investments in the W&L segment in the immediate future, are suddenly being seen as good news for the real estate sector.

The sheer investments envisaged are mammoth and can actually make the sector seem attractive to investors too. The high growth optimism is already attracting both foreign investors as well as PE firms, sensing a vast opportunity in the growth momentum.

And there are reasons why the investors are finding this segment more lucrative than the other segments. There is a huge volatility associated with the residential segment, which is not there in the W&L segment. The stability of the segment and huge lease potential is also a sure winner for a risk-averse REIT.

According to some numbers I have read, the demand in W&L segment is expected to touch 125 m sq ft in the coming 5 years. The optimism could actually become an understatement, if the indications that the Government will allow 100%  FDI in eCommerce actually come true.

"Make in India" will also spur the Manufacturing sector demand and the requirements for the segment will increase many-fold. 

And with the growth in the segment, the eventual beneficiary will be the real estate sector. The W&L segment could well be the one thing that can re-write the real estate growth story!