The investment vehicle called REITs (real estate investment trusts) is once again in the news, and the Indian real estate sector eagerly anticipates this internationally tried and tested platform for smaller investors to invest in larger real estate portfolios, writes Arvind Jain, Managing Director, Pride Group, a property development conglomerate that has projects in Pune, Mumbai and Bengaluru.
The REITs concept has been established for decades in the United States and Australia (in case of the latter, under the name LPT or Liquid Property Trust). Asia is now also fully attuned to this investment vehicle; Singapore, Malaysia, South Korea and Japan have seen significant success levels with REITs, and Taiwan also launched its own REIT in 2005.
REITs are a unique method of investing in real estate that can potentially generate much higher yields than stocks and bonds. Since they are not prone to the kind of fluctuations one typically observes in the stock market, they present investors with a higher margin of safety. They also generate capital gains and represent a stable income source.
How an REIT works
Basically, a Real Estate Investment Trust (REIT) is an entity that owns and often operates income-producing real estate like apartment-based residential projects, malls, hotels, commercial office buildings and even warehouses. This means that the company buys, develops, manages and sells real estate assets with the sole purpose of inviting investors to put their money into a professionally managed portfolio of properties.
Investors are also given an unprecedented tax exemption opportunity on the corporate level. In some cases, such an entity may even finance real estate. REITs is particularly attractive to smaller investors because it offers higher returns than, say, a fixed deposit. Also, they represent a diversified portfolio of assets at low investments. REITs can serve as the ultimate landlord of select rented properties.
REIT focus in India
REITs will concentrate on the following property market areas:
* Commercial: office complexes and IT parks
* Hospitality: hotels, leisure and healthcare
* Retail: large malls
* Industrial: manufacturing setups
* Mixed use development sites, including residential
However, it should not be assumed that REITs will result in the availability of an instant wealth-building instrument for investors. The product is still an unfamiliar one for most, and a long period of trial and error will necessarily precede the first REITs-related success stories in India.
Building wealth through REITs
Maximising profits through REITs requires intelligent portfolio diversification. A lot also depends on the format that REITs take in India. To generate good financial returns for its investors, a REIT will need to own a high-performance investment portfolio. Ideally, it will operate in several metropolitan and secondary cities. Returns will begin to flow in when the company has managed to partner and complete several large quality developments, and to consistently maintain the quality of portfolio components.
If and when REITs becomes a part of the Indian investment scenario, they will definitely provide significant advantages to investors. The returns are passed on to the investor regularly, and there is almost zero scope for bureaucratic ambiguity in the process. This is in direct contrast to the many pitfalls inherent in direct investment in real estate, where an investor may or may not receive returns with any kind of regularity, if at all.
The REITs vehicle will ease the process of investing in a healthily diversified real estate portfolio and make it a realistic option for layman investors and professionals alike. REITs will also play a significant role in stabilising the real estate market and making it more transparent, attractive and viable for all kinds of investors.