SEBI draft paper on Real Estate Investment Trusts (REIT) permits real estate funds which will invest in completed and revenue generating real estate. While you can invest without physically buying a property, your investment carries risks of price corrections and hence fraught with timing of entry and exit errors
On 10 October 2013, the Securities and Exchange Board of India (SEBI) issued a draft Real Estate Investment Trusts (REITs) Regulations, 2013. A REIT is a pooled investment entity registered with SEBI, just like a mutual fund. REITs invest primarily in real estate of completed and revenue-generating properties. The rental received from these properties will be distributed among investors as dividend. Real estate is a big ticket investment with a huge chuck of money getting locked in buying a property. The advantage of REIT is availability of exposure to real estate with a smaller ticket size as well as diversification of investment by REIT.
As in mutual funds, REITs too will have managers who will manage the realty portfolio and try to earn higher returns. The minimum asset size that a REIT will be required to have is Rs1,000 crore. It will surely achieve diversification across locations and types of real estate like offices, warehouses, shopping malls. An individual investor cannot achieve such diversification in a capital intensive real estate investment. While the REIT managers should be doing due diligence before investing in any property, real estate in India is marred with disputes and title issues and corruption. The regulatory framework around the real estate sectors needs to be vastly improved to give fair chance for REIT to succeed. In June 2013 Union Cabinet approved the Real Estate Regulatory Bill. If implemented correctly, it will help the real estate sector.
While Sebi rules will help investors avoid the developmental risk of investing in under-construction projects, real estate in India has its up and down phases with the cycles being longer and more volatile than in the case of equities. Investing in REIT at high price levels and exiting at wrong time of downturn will inflict heavy losses. In difficult times, you may have to sell your units at a steep discount just like you get a beating when selling property at a wrong time. That REITs would be listed on stock exchanges is not of much comfort because real estate in India is an illiquid asset. Moreover, the Sebi draft gives leeway to have the Net Asset Value declared only for a minimum of two times in a year. A six monthly updation in the valuation capturing key changes in the last six months has been specified.
SEBI has given the minimum subscription size to be Rs2 lakh and the unit size shall be Rs1 lakh. Thus, REIT will be restricted to HNI (high network individuals), which seems appropriate. SEBI has invited comments on the Consultative Paper latest by 31 October 2013. The final regulations may incorporate the received feedback.
In the next article on REITs we will explain how REITs work in the US and how different they are from the Indian version as envisaged by Sebi.
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