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The release of draft regulations on real estate investment trusts by SEBI is a welcome step as units of real estate can now become a useful addition to retail investors’ portfolios. For long, the real estate policy framework has been structured on certain optimistic notions. One was that demand would be driven by actual users, both commercial and residential, basically using their own equity, or at least a significant chunk of it. Two, the promoter who acquires the critical raw material — land — and develops it ought to have only limited access to institutional finance. Thankfully, the idea that owners must come on board with a large equity component has given way to more reasonable mix between debt and equity that is consistent with the idea that long gestation projects with stable cash-flows can afford to be funded with a larger portion of debt.

The new private sector banks were quick to spot the opportunity in this sector and were at the vanguard of a movement propelling the growth of residential housing. But banking institutions continued to view the working capital needs of real estate promoters with a certain reservation, partly because of the disfavour with which the Reserve Bank of India views such lending. Consequently, the real estate sector tended to be backed by black money or resources with underworld connections. The lack of access to funds from the organised sector might not matter much when there is robust demand growth, as in recent times, with funds getting turned over double-quick. But if a slowdown sets in, as is inevitable in any industrial activity with boom and bust phases, the absence of institutional credit could lead to disruptions in production activity that would hurt the interests of construction labour more than anything else.

The entry of pooled retail money or, for that matter, resources from a few high-net-worth individuals opens up an extra source of finance. But for now, SEBI visualises a relatively narrow role for such funds. It wants the schemes to be invested in completed projects. This means the trusts will pay tax at the crippling rates States levy, on both the land and the building, and thereby lose a huge chunk of value addition. SEBI was perhaps wary of unscrupulous promoters making real estate investment trusts park their investments in projects with questionable consumer demand. A different solution must be found. Restricting such investments to projects rated above a certain level by rating agencies and those with municipal and State clearances in place, backed by sound construction contracts, might be an alternative. In any case, there is reason to hope that public response to the scheme outlined will throw up something to address the SEBI dilemma.

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