Sometime later this year, India may see its first Real Estate Investment Trust (REIT) list on the bourses, with the Blackstone-backed Embassy group planning to float one. REITs have been quite a hit in Asian markets such as Singapore and Hong Kong, but have stayed on the drawing board in India for the last many years. If they take off, there may be light at the end of the tunnel for the struggling real estate sector. Market regulator SEBI has been tweaking its norms of REITs to enable them take off successfully, but progress has been slow.

What is it?

REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns. These are usually commercial properties (offices, shopping centres, hotels etc.) that generate rental income. An REIT works very much like a mutual fund. It pools funds from a number of investors and invests them in rent-generating properties. SEBI requires Indian REITs to be listed on exchanges and to make an initial public offer to raise money. Just like MFs, REITs are subject to a three-tier structure — the sponsor who is responsible for setting up the REIT, the fund management company which is responsible for selecting and operating the properties, and the trustee who ensures that the money is managed in the interest of unit-holders.

You can invest in REITs in primary and secondary market and exit any time you want. But they will have a minimum investment requirement of ₹2 lakh. Also, the minimum offer size of an REIT is ₹250 crore. Though countries such as the US and Singapore have seen REITs providing good returns, in India, issues such as lower rental yields and an illiquid and opaque property market have discouraged REITs.

Why is it important?

The Indian real estate sector has been facing a liquidity crunch on account of unsold inventory and low demand. REITs can help cash-strapped developers to monetise their existing property. Indian investors don’t have too many regular income options. SEBI requires REITs to distribute a minimum 90 per cent of their income earned to investors on a half-yearly basis. Similarly, 90 per cent of sale proceeds too are to be paid out to unit holders unless the amount is reinvested in another property. Thus, you get to receive regular income and also get to benefit from price appreciation, thereby boosting your returns. In real estate sector, both rent and capital appreciation from property depend on the location, infrastructure and industrial development around that area. REITs juggle these risks through a diversified portfolio of properties.

Why should I care?

If REITs take off, you can invest in the property market with a minimum amount of ₹2 lakh, which is far cheaper than buying property. REITs an be a new asset class to explore. Most of the developers are bullish on this because they have already invested large amount in commercial properties which are generating good returns. Further, there is transparency as you will also know the valuation of the REIT once in every six months. Many investors buy second or third homes for rental income. REITs could turn out to be a better option on account of their diversification.

REITs can reduce the risk related to your property investments as 80 per cent of the value of the REIT should be in completed and rent-generating assets. They are required to be run by professional managements with specified years of experience notified by SEBI.

The bottomline

REITs appear all right on paper. But the proof of the pudding is in the eating.

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