Reits: An alternative route

These products are suitable for investors with medium risk appetite, seeking to invest in real estate

Soon, real estate investors would have another investment vehicle to ride — real estate investment trusts (Reits). Though the Securities and Exchange Board of India (Sebi) had initially contemplated permission to launch the product in 2008, it finally brought out a consultative paper on the subject for public feedback on Thursday.

Industry players say if all the clauses are accepted, the products are likely to qualify favourably on various parameters such as transparency, diversification, returns and liquidity. The entry barrier, at Rs 2 lakh, is even higher than the minimum investment limit of Rs 1 lakh in the SME (small and medium enterprises) exchange. This would ensure too many retail investors aren’t drawn to the product.

What is impressive is the transparency the market regulator has sought from these investment vehicles. First, 90 per cent the money would have to be invested in complete and revenue-generating projects. Also, the entire corpus cannot be invested in a single project, unless the corpus is less than Rs 1,000 crore. These two clauses, experts say, are aimed at ensuring investors don’t end up putting their funds in an under-construction property that would only start giving returns after a few years. The move also ensures diversification.

The valuation norms are strict. The projects would have to be valued at least once a year and updated every six months. Accordingly, the net asset value of the Reit, would have to be declared twice a year. In fact, Sebi has also inserted a clause that the Reit cannot pay more than 110 per cent or sell at less than 90 per cent of the property price.

Returns, according to market players, could be an issue. Given the six-seven per cent rental returns commercial properties currently offer, investors might not be too enthused. For instance, short-term gilt funds have returned 9.5 per cent in the past year. Ashutosh Limaye, head (research), Jones Lang La’Salle India, says, “In developed markets such as the US, Reits return six to seven per cent which is attractive in those markets.”

It is, therefore, hardly surprising property experts are upbeat about the product, as it is likely to attract more investors for builders struggling for cash. Experts say much as they look at a mutual fund’s portfolio, they would also have to look at the assets being bought by the trusts. “That is, the quality of assets, tenant, rentals earned and capital values,” says Anand Moorthy, head (real estate services), RBS Financial Services.

Also, since the rentals of commercial properties are decided for two-three years at the beginning of the contract, the rental returns wouldn’t change substantially for these periods.

Experts said Reits could be successful if these could be subject-specific. For instance, in developed markets such as the UK, France and Singapore, there are mall- or warehouse-centric Reits, generating good income for investors.

The product is expected to be distributed by mutual funds and brokers. However, there is no clarity on how the product would be taxed. Experts said they were seeking clarity from Sebi in this regard.