Financing in indian real estate sector

India has still not tapped one form of property financing that is widely used abroad – Real Estate Investment Trust (REIT). The use of the REIT as a financial vehicle had its origins in the US, created by the US Congress in 1960, to make investments in large-scale, income-producing real estate accessible to smaller investors through the purchase of equity. This allowed small investors to add property as an asset class to their investment portfolio, which can improve the risk / return characteristics of an investment portfolio. UBS research estimates based on historical data for the US and UK indicate that real estate can enhance the efficiency of an investment portfolio due to the low correlation of both direct and indirect real estate investments with stocks & bonds. According to estimates by Global Property Research, REITs showed a yearly total return in local currencies of 12.5% over the last ten years.

Globally, real estate investor is a sizeable asset class, with the volume of assets under management estimated at around 14% of the global market capitalization of global assets in equities, bonds and real estate. While much of the investor real estate is still directly held, listed real estate vehicles, such as REITs, have become a substantial segment of the investor real estate market, which accounts for an estimated USD 400 billion in market capitalization globally. Since the early 1990s, the use of REITs or REIT-type products has boomed worldwide, with the total value of US REITs now estimated to exceed USD 300 bn, from around USD 20 bn in 1990. In the Asia-Pacific, REIT-type listed property trusts were established in Australia in the 1970s and have grown substantially, with an estimated USD 50 bn in assets. Japan and Singapore have also introduced REIT-type legislation in recent years, and have seen rapid growth in the total value of the assets held in such vehicles. Taiwan, Korea, Hong Kong and Thailand also having subsequently introduced REIT-type vehicles, and Malaysia has recently improved its legislation to make its REITs in the US and other markets has been the tax-efficient regimes provided for this vehicle.Whereas large investment funds or pension funds can build up a large, directly held suite of properties to improve their overall investment portfolio construction, this is very difficult to do for smaller investors via the direct ownership route. Therefore, REITs potentially offer distinct advantages for investors, providing greater diversification through investing in a portfolio of properties rather than a single building, and accessing professional property management services. Diversified REITs invest in a variety of property types, such as shopping centres, apartments, warehouses, office buildings, hotels, and health care facilities. Some REITs specialize in one property type only, such as retail or residential developments.Given India’s very substantial needs for infrastructure, infrastructure REITs may also have potential applications in India, as investment vehicles for financing transport infrastructure such as airports, ports and roads, as well as utilities and social infrastructure such as schools & hospitals. REITs can also be used by the public sector to release the capital tied up in government assets, such as office buildings, or to deterge property assets from the balance sheets of public sector corporations.

IMPACT ON REAL ESTATE SECTOR

Increased Investment: In the words of Sam Zell, Chairman of Equity Group Investments L.L.C. and Chairman of Board of Equity International Properties, Ltd. and one of the most influential men in the United States as far as REITs are concerned, “Although India is an enormous country, the available investment grade real estate is relatively limited. Since REITs are significantly income vehicles, they rely upon the availability within a liquid real estate market to acquire and dispose off investment-grade

income-producing properties. India, at this moment, requires a significant infusion of capital to create the inventory that could ultimately support a successful REITs structure in India.”Quality ControlAn efficient well-managed real estate investment vehicle, which can lead to an efficient movement of inflow of funds in a well-organized way, will also fulfill the need for quality commercial, residential, hospitality and even healthcare facilities. This is sensed by the foreign and domestic players alike.At this juncture, players in the Indian real estate must consciously institute and implement standards and should participate in the developers rating system so that they can harness the competitive advantage. Strict compliance to regulatory standards would help bring credibility to the entire real estate industry and would be good for smaller developers and builders.

Better Valuation

As the industry begins to expand, the public REITs will most likely be the net buyers of assets, many of which may be acquired from smaller owners / developers.

For this, a better system of the valuation of real estate assets will be required, as the market matures and liquidity increases

.Benefit to Small Developers

REITs would provide the much-needed equity capital to small developers / builders, who are currently burdened with costs of huge borrowings. Further, through REITs, small developers / builders will be able to move their assets into the REIT structure and thereby be able to realize a fair price for their developments.

Development of the indian reit's market

The Government’s main aim for REITs is to ensure that the returns from the different forms of indirect or direct property investment are taxed in broadly the same way. Rules would be needed to ensure the development of an appropriate Indian REITs market that maintains a fair regime for all taxpayers.

Regulation

It would be best for India to have a separate regulator for the real estate industry, with a focus on minimizing the hurdles for investors; offer faster approvals to projects; and make it easier for d2evelopers to obtain funding. This will be the foremost step to rationalize the path because REITs requires quality management and an efficient tax and regulatory regime. This will form the backbone to REITs and the real estate industry itself in the future.

Corporate Governance

As real estate plays a key role in the wider economy, the introduction of a tax-transparent unitized real estate would confer considerable primary and secondary order benefits to the economy as a whole as well as to end users. Almost 75 percent of the real estate industry comprises smaller, unorganized players, and therefore corporate governance must be placed on the priority list. Widespread distortions in India’s land and property markets result in nearly 1.3% loss of economic growth each year, which should be checked.

Increased Transparency and End to Red Tape

The primary barrier seems to be one of transparency and policy rationalization. The Lang LaSalle transparency index places India at the 41st rank and in tier 4, which signifies low transparency. China, which is India’s main competitor, ranks 39 on the same index. Says Sam Zell, “An integral part of the success of REITs has been their transparent nature and their highly predictable circumstances."