Making the REIT market more attractive

Real estate investment trusts (REITs) are listed companies that own and operate income-producing real estate assets. They offer a way to invest in real estate without directly purchasing and managing properties. India is still in its nascent stage concerning REITs and is faced with numerous challenges.

The Indian real estate market is still relatively illiquid. It can be challenging to buy and sell real estate assets quickly and efficiently. This makes it difficult for REITs to acquire and manage assets.

Secondly, the regulatory environment for REITs in India is not as favourable as in other countries. Indian REITs are required to invest at least 80 per cent of their assets in completed commercial properties. This leaves them with little flexibility to invest in other types of real estate assets, such as residential properties or infrastructure projects.

In comparison, REITs in western countries and Singapore have much more flexibility, giving them a larger range of investment opportunities that allows them to diversify their portfolios better. Another regulatory hurdle for REITs in India is the minimum investment requirement. Indian REITs are required to raise at least ₹250 crore (approximately $30 million) through their initial public offering (IPO) and the value of the assets owned or proposed to be owned by REIT should be at least ₹500 crore.

This high minimum investment requirement makes it difficult for smaller real estate developers to list their assets as REITs. Further, with regard to participation of foreign investors in Indian REITs, there is a complex regulatory and registration process that hinders foreign capital inflows, while in other developed nations there is little to no restriction regarding foreign investors’ participation. Finally, Indian REITs cannot purchase any foreign assets.

The way forward

First, reduce the minimum investment requirement for REITs. ₹100 crore, or lower, will make it easier for smaller real estate developers to list their assets as REITs and raise capital.

Second, allow REITs to invest in a wider range of real estate assets, thereby enabling them to reach a broader market.

Further, there is a requirement to hold 15 per cent of REITs units for the first three years after the formation of REITs by the sponsors which then reduces to a minimum of 5 per cent of the outstanding units at all times thereafter. The Indian regulators have mirrored this provision of minimum retention requirement of 5 per cent from European Banking Authority’s (EBA) Regulatory Technical Standards (RTS) which may not be suitable in the case of Indian REITs.

The holding period of three years and holding ownership limit of sponsors can be reduced gradually so that reinvestment of capital is encouraged, making REITs more attractive. In addition, simplifying the regulatory process for REITs regarding foreign investors’ participation which would enhance the foreign capital inflows.

Finally, there is a lack of awareness and investor appetite for REITs, and this is mainly due to the lack of a track record for REITs in India. Hence, increasing awareness about the product would significantly contribute to realising the REITs potential in India.

By taking these steps, the government can create a more favourable environment and attract more investment into the sector.

Venkat is the Executive Chairman and Co-Founder of Sernova Financial, UK and Williams is an analyst at Sernova Financial

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