The Hindu Business Line : On the REIT track

With promises of high returns and liquidity, Real Estate Investment Trusts are viewed as attractive investment options. When will one of these come to India, asks Veena Venugopal.

From big corporate builders to the neighbourhood construction company, real estate usually spells RICH. So how can small and medium sized investors thrive in this `high return' industry without getting their hands dirty in cement and mortar? The answer perhaps lies in four words, Real Estate Investment Trusts(REITs).

A REIT is a security, much like stocks. They usually sell on the major exchanges and invest in real estate directly, either through properties or mortgages. In many countries, REITs receive special tax benefits. Add to the high yields as well as liquidity and it makes for an attractive investment proposition.

There are different kinds of REITs.

Equity REITs own properties and their revenues come principally from rents.

Mortgage REITs lend mortgage money to real estate owners or buy existing mortgages and mortgage-backed securities. Their revenue is mainly the interest earned earn on the mortgage loans.

Hybrid REITs invest in both properties and mortgages. These are said to be lower in risk as the mixed portfolio cushions market ups and downs .

So what makes REITs investment different from other paper-based investments? According to Mr Rajan Sastri, Head - Advisory Services, Indiaproperties.Com, the advantages are many. First, transactions are transparent and returns are disbursed regularly to the investor. Second, higher safety compared to mutual funds, equity and other unsecured investments. Third, prices are not volatile."REIT can fall in value only marginally because the intrinsic worth of the property is unlikely to ever go down. Market forces alone and not weak fundamentals can impact value. Direct investment in property is vulnerable to builder defaults — either deliberate or due to inadequate finance.

"Next to pure equity, REITs yield the most returns (more than gold). Sometimes the returns have exceeded equity; for example, in 2000 when Standard and Poor's 500 stock index lost 9.1 per cent, REITs gained 21.89 per cent.

In 2002, S&P 500 lost 15.5 per cent, REIT picked up 11.89 per cent.

In the first three quarters of 2003, S&P 500 lost 28.16 per cent, REIT went up 4.28 per cent," he pointed out.

In India the real estate market is reportedly growing 30 per cent annually. A recent DSP Merrill Lynch report suggests that real estate could grow from $12 billion to $45-50 billion in five years. "While the sector grapples with high transaction costs, lack of transparency and fragmented developers, recent events signal that the sector could be poised for rapid growth," the report said.

According to them, real estate returns in India are estimated at 12-14 per cent annually with an upsurge in commercial real estate owing to the BPO boom. "Lease rentals are picking up steadily and there is demand for quality infrastructure. Further, a significant rise in demand is likely as the outsourcing boom moves into the manufacturing sector. The housing sector has been growing at about 34 per cent annually, while the hospitality industry witnessed 10-15 per cent growth last year," DSP Merrill Lynch said.

The scene is just right for REITs to deliver attractive returns. However, regulatory hurdles have prevented market players from introducing REITs in India.

Property companies, as well as analysts do not foresee the introduction of REITs in India for another year at least. Extensive legislation in the legal, regulatory, accounting and tax spheres is necessary for any REIT to come into existence.A small start has been made with the Securities and Exchange Board of India recently allowing venture funds such as HDFC Venture Fund and ICICI Ventures to launch real estate funds.

These are close-ended funds that require investment for the entire duration of the fund, usually around seven years.

Also, as they are currently targeted at institutional investors and high net-worth individuals, the minimum investment is a rather high Rs 5 crore per application.

Anticipating better returns compared to debt and equity products, several banks and corporate treasuries are believed to have invested some amount in these funds. The retail investor, however, has a long wait ahead for REITs.

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