REITs can bring change in Indian real estate market
It’s generally presumed that bringing in a regulation is the only solution to correct the real estate market in the country. While it is important to bring in a regulation, it is equally important that the market has the right kind of financial tools linked with real estate offerings. Developed real estate markets around the world that are considered transparent have better financial products promising safe and better returns on investment.The Indian market, which has problems such as lack of regulation, irregularities in the contracts procurement and shortage of skilled professionals, needs its own financial investment tool!
Among all the asset class, real estate investment trusts or REITs provides us that option. REITs are investment vehicles that invest in return-generating real estate. This investment may either be in the form of properties, mortgages or mortgage-backed securities. The trust collects money from retail or institutional investors in return for shares in the property and its managers then deploy the funds into real estate (usually commercial) projects. The income, which is in the form of rent or lease amount is then distributed as dividend among investors.
Last year, Securities and Exchange Board of India (SEBI) released consultative guidelines for the operation of REITs in India, five years after it introduced the initial guidelines. The consultation paper on SEBI (Real Estate Investment Trust) Regulation 2013 has laid a roadmap for the introduction of REITs in the country.
There are, however, some limitations. REITs will invest only in one sector and primarily in commercial real estate. Also, these directly buy into real estate instead of investing into a company stocks. This has some benefits – the investment will provide a safety net to investors against any delay in project completion and disputes. The commercial real estate sector has evolved significantly in the past decade due to change in the business environment and the economy. The growth witnessed between the year 2005 and 2010 has now slowed on account of a number of reasons. Because of the huge demand in the past, several commercial projects were announced.
While there was a glut in the market with the proposed upcoming projects, most projects lack quality and standards.
The economic slump has hindered the investment sentiment, according to the findings of the RICS India Commercial Property Survey Q3 2013.
The decision to allow listings of REITs as an investment product will boost the liquidity situation of cash starved developers, who are struggling to find funds for their construction activities. While REITs will provide investors an investment avenue, implementation will also give them easier exit routes along with regular income in terms of returns.
If implemented it will positively impact the commercial sector, where large office buildings and parks can offer huge returns by way of REITs. Global investors who are risk averse may find ready leased properties as a better investment option.
However, the government should be careful in implementing it. The consultation paper defines, “Principal Valuer” for the purpose of valuation “as a person who is a registered valuer under Section 247 of the Companies Act, 2013 and assigned as such and who has been appointed by the manager to undertake valuation of the real estate assets.” However, the introduction of valuers in the assessment assets to be leased by way of REITs will require the adaption of international valuation standards for evaluating the asset value for the computation of the returns.
There will be a requirement for valuations to be carried out by professionals as defined in the companies bill, and effective valuations will be at the heart of a more transparent REIT market. The current guidelines refer to valuations being carried out as per International Valuation standards (IVS) which is a step in the right direction. However, one area of concern is that in case of discrepancy between IVS or domestic standards issued by ICAI, the latter would prevail. This could cause some confusion and needs to be addressed.
Moreover, the issue on taxation also needs to be clarified. I am hopeful that the new government will be able to transform the draft paper into an Act.
• The author is MD of RICS, South Asia. He can be contacted by email at firstname.lastname@example.org