Impact of REITs on real estate industry

The last couple of years have witnessed an increasing trend of foreign investors buying property in India. Well, the real estate industry has received a boost and the government has taken a number of proactive policies to streamline the real estate business in the country. The Real Estate Investment Trust (REITs) will soon come into play, further influencing the sector. It is necessary to carry out substantial advancements in the industrial sector to pacify urbanization. The real estate industry is presently going through a financial crisis and it needs an alternative mechanism to get capital to execute ambitious projects. Small investors, too, are looking forward to investing in the real estate sector in India. All these aspects have made it necessary to introduce REIT in India.

The listed REITs have got certain liquidity and transparency advantages. Over the world, various countries have adopted the REITs and have achieved success in a number of markets. Once successfully implemented, the investors will look formed to make investor-oriented investments. This is because certain dividends are associated with the REITs. This is likely to be one of the most effective government policies, devised to leverage the real estate industry in the country.

 The Securities Exchange Board of India (SEBI) is framing the regulations for REITs in India. Certain changes have been made in the previous guidelines, according to the needs of the industry. As per the latest guidelines, it is necessary for the REITs to register with SEBI. Besides, it is necessary to list every unit of REIT on the stock exchanges. The guidelines have been drafted by SEBI, in terms of income distributions, valuations, investment conditions, leasing, disclosures, transparency, and so on. The latest updates made by SEBI reveal that around INR 500 crores real estate assets should be with the REIT. According to the earlier requirements, the minimum requirement was INR 1,000 crores.

REITs can invest in properties directly, or through an SPV (Special Purpose Vehicle). Eighty percent (80%) of the total valuation of a REIT is to be invested in revenue-generating and completed assets. The remaining 20% of the amount can be used in developmental areas and purchasing other assets. However, REITs may not be invested in mortgages, agricultural land, and vacant land. REITs can raise resources from the resident, investor or foreigner and is not allowed to distribute less than 90% of the total value of distribution cash flow to the investors.

In order to fulfill the interests of the investors, the guidelines will ensure that the system has transparency, disclosure norms, and a stringent valuation mechanism. Evidently, the success of investment trusts in the country relies on the capability of the country to tailor the rules and regulations that govern REITs in a way that suits their markets. The government authorities need to provide a substantial degree of support that will make the REIT regime less restrictive. This will ensure a sound business ambience for the international investors. India has got enough potential in the real estate market. The incorporation of REITs will help the sector to further grow.