SEBI tries to get it REIT again

October 7, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Ease of funding is a key recommendation for the growth and development of the Indian realty sector in the coming decade. New instruments of funding should be allowed into the sector, especially real estate investment trusts (REITs) — an investment mechanism that buys income-generating real estate assets and passes on the yield to investors.

In this current climate of dwindling investor sentiment and a plunging rupee, there is a need to implement funding options such as REITs for infusing much needed liquidity into the sector. The total REIT market size in the Asia-Pacific region is approximately $205 billion but India has been unable to take advantage of this funding opportunity, mainly because of the lack of an existing regulatory framework.

Since India is yet to have such a mechanism in place, the government and the Securities and Exchange Board of India (SEBI) have been working on a regulatory framework for introducing REITs. SEBI had issued draft regulations for REITs back in 2008, but they were withdrawn in favour of allowing asset management firms to launch real estate mutual funds. That initiative too, unfortunately, failed to take off.

Industry majors say India’s taxation regime is a leading impediment and needs to be made conducive for the REITs model to be successful in India. SEBI is trying to revive REIT again and various groups have been assisting the regulator in forming new guidelines. Keeping in mind earlier obstacles, it’s advisable to focus efforts on implementing a tax regime conducive to REITs in India.

SEBI intends to re-launch REITs on the alternative investment fund (AIF) platform by creating a category to help investors subscribe to REIT units. Like mutual funds, these units will also invest in rent-income-based real estate assets, and may be listed or unlisted. In line with the worldwide practice of operating REITs, SEBI proposes that 90 percent of the income generated from REITS be distributed as annual dividends. Incidentally, the AIF is established or incorporated in India in the form of a trust or a company that collects funds from investors.

The only operational real estate investment structure so far in India, enabled by SEBI in 2004, has been the Real Estate PE fund. This has been the largest contributor to the real estate asset class ever since the regulator empowered the venture capital financing regime to participate in real estate. It is possible for the PE structure to assume the nature of a REIT in some form, since it also allows funds to invest in developed assets.

Once in place, REITs could provide an additional exit route for investors and enable retail money to be channelled into India’s realty sector through a regulated network. The introduction of REITs would propel the sector by spurring capital inflows and fostering institutional credibility.

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