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In the REIT direction

Mid Day - 22 August, 2014

Mid Day - Pg. 17

Mid Day:

In the REIT direction

THE Securities and Exchange Board of India (SEBI)’ s approval to the establishment of real estate investment trusts (REITs) has evoked a positive response from the industry. The Board said that REITs should operate with an asset pool of at least R5 billion and be allowed to invest only in commercial properties, thereby bringing in more revenue to the real estate market, suggest experts. We analyse the impact of this move on the real estate sector.

Capital call A major issue before the real estate sector is fund constraint. With banks charging high interest rates, it had become tough for developers to get loans for housing projects. The situation worsened with low sales and builders had to stall work on projects.

Talking about the financial relief that REITs will bring, Surabhi Arora, associate director- Research, Colliers International, said, “ The realty sector is capital- intensive and requires incessant capital supply for long term, as construction has lengthy production cycle. REITs are entities that invest in revenue generating real estate assets and sell their units like a stock on the major stock exchanges.

REITs will bring the much needed capital infusion in the commercial real estate market and provide an exit route to investors from large projects.

Moreover, these instruments would not only offer much talked about benefits of a new source of capital but also would offer many long term benefits such as improved corporate governance in the sector. The advent of REITs would help in the evolution of much more transparent and mature market.” Developers, too, endorse this view.

Gaurav K Shah, director- Marketing, Ravi Group, said, “ REITs getting a go ahead by SEBI will enhance the depth of the country’s realty market. It will offer financing as well as exit options to developers and investors. The move by SEBI to issue guidelines for REITs is laudable as this would bring in positive sentiments in the real estate sector.” Time for transparency Countries like the US, Netherlands, Australia, Canada, Belgium, Japan, South Korea, Singapore and Hong Kong and France have adopted the REITs system, resulting in high dividends for them.

Experts feel it will make the real estate sector more transparent. For starters, it reduces over dependence on one source of financing and encourages more transparency. The fact that they are monitored by a regulatory body which increases the confidence of investors, as the financial records of the company are publicly declared. This will encourage even small scale investors to put their money into real estate.

Anuj Puri, chairman and country head, Jones Lang LaSalle India, said, “ It’s gratifying to note that SEBI intends to deliver on its assurances of bringing better and faster funding into Indian real estate. As the drafts for REITs stand now, further clarity about taxation eligibility norms is definitely required and will doubtlessly come before the first listing goes up.

When this happens, there will be a vastly increased interest from foreign investors.” Commercial gains Experts said the introduction of REITs will help the commercial real estate sector. With 50 per cent of the commercial properties hopefully getting listed under REITs, a large sum of money will enter the sector. Mukesh Bhagtani, CEO, Jaycee Homes, said, “ REIT as a financial tool linked with real estate offerings will bring greater transparency into the sector. It will pave the way for developers to get access to cheaper funds and give people a chance to invest small amounts in the real estate market. It will revive the prevailing stagnant scenario.

The growth of the commercial sector will in turn help expand the housing market.”

Ever since the new government came into power, it has shown the intent to generate affordable housing and pump in more money into the sector. Shah added, “Those planning to invest in property are expecting positive policy changes that are expected to boost the housing segment. This segment remains cautiously optimistic, and is expected to remain so in the short to medium term. In the next 3- 4 years, the sector can attract investments after its implementation. In the present scenario, if the sector has to bounce back from the lows, there is a need to introduce such a mechanism is needed.”

- Additional reporting by Kartiki Nitin Lawate

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