Real Estate Investment Trust (REIT) is a globally accepted investment product class for both institutional and retail investors into Realty sector. In layman terms, with REITs a retail investor can participate in Real estate market as easily as he participates in equity or debt markets. REIT is a portfolio of income producing real estate assets, with a secured tangible backing which provides a regular return to its investors.
REITs by definition allows inclusion of Retail investors to invest in Realty, which currently is highly overpriced and requires significant capital outlay . Other similar asset classes like Gold can be bought and sold easily in the form of Mutual Funds. However, real estate in India as an asset class was out of reach for a Retail Investor till now. With REITs coming in, a retail investor will be able to include real estate as a part of his/her investment portfolio.
Real estate as a market is currently highly opaque. Since REITs will be highly regulated, a lot of transparency within the sector will come. Much needed low cost equity capital will also be infused in the sector that is right now mostly funded in the form of high cost debt, that in turn increase the price points for home buyers despite sluggish demand.
As real estate has low co-relation with capital markets and is positively co-related with inflation, infusion of capital in the sector through REITs should pave the way for revival of India’s real estate market.
Guidelines are being drafted for the regulation of REITs in India as we speak. We welcome this move as it will mark the advent of much needed reforms within the sector. A sector famous for its unregulated regime.
However, one has to remember that REITs are at a very nascent stage in the country. It is imperative that both regulators & policy makers study mature markets as well as recently opened markets to come up with a strong & supportive control mechanism/policy framework. Raising, managing and deploying of capital, infused through investment in REITs in an appropriate way, will be of utmost importance.
The average Indian investor needs to be educated on the risk-reward matrix of investing in REITs.
Also, there is a question of who can form and manage REITs? If policy makers allow the real estate companies to form REIT’s instead of independent REIT managers there is high chance of conflict of interest. Developers may try to offload their inventories to REITs, exposing the system to multiple level of risk.
There is no doubt that REIT can be a game changer for the highly sluggish real estate sector. The interest is gaining heights from both manufactures and investors. However, more clarity is needed in terms of regulation of this system.