Dear subscribers, Hereโs an interesting article which caught my eye last week. If you have Rs 2 lakh to invest, your bank may roll out a red carpet, your stock broker may inundate you with hot tips and the friendly neighbourhood jeweller may even offer a discount on making charges. However, you will probably get laughed out of the estate agent’s office. Not anymore. SEBI issuing final guidelines for real estate investment trusts (REITs), you will soon be able to get a piece of the action in the property market with as little as Rs 2 lakh.
REITs are just like mutual funds, but instead of using the money collected from investors to buy stocks and bonds, they invest in property. After more than a decade of discussions, this unique form of mutual fund is finally taking shape in India. Last month, the Union Budget removed an important hurdle by giving pass-through taxation status to REITs.
Last fortnight, market regulator SEBI issued final guidelines for REITs, settling several of the concerns raised by the real estate industry. Industry watchers claim that the launch of REITs will increase the flow of funds to the cash-starved real estate industry. “Even if half of the currently available Grade A office space gets converted to REIT and is listed in the next 2-3 years, it can mean an inflow of Rs 60,000-72,000 crore,”
The problem with real estate as an investment is that it either occupies no place or a lot of it in a portfolio. Whether you invest in a residential property or commercial space in a metro or tier I city, the minimum investment is normally upwards of Rs 30-40 lakh. SEBI guidelines for REITs have pegged the minimum investment at Rs 2 lakh, which will allow retail investors to participate in the real estate market. In the secondary market, the minimum holding could be even lower at Rs 1 lakh.”REITs allow even middleโ. Income individuals to invest in real estate. Without this, they can’t participate in real estate because of the huge entry barrier. The low ticket size means that investors can diversify their portfolios by including real estate without investing huge amounts in the asset class.
Taxation of REIT income
This was the biggest bone of contention for REITs. The recent budget offered some relief when the finance minister announced that REITs will be a pass-through vehicle. In the earlier structure, both the trust as well as the investors had to pay tax. Now, the trust will not pay tax on income. Only the investor will be taxed when he gets the income or sells the units.
What are the risks?
The biggest risk can come in the form of developers keeping their prime rent-earning properties and dumping their not-so-good assets on REITs. Though there will be professional valuers, the real estate market is notorious for its opacity. It is still a builder’s market and the investors don’t have any access to the valuation process. Though the introduction of REITs is expected to improve the situation, the lack of transparency and the black money component in the real estate deals is another possible risk. Finally, there may be stable regular income, but the capital appreciation or depreciation depends on the market price of commercial real estate and, therefore, will be volatile.
Sebi’s guidelines for REITs are only the first step. There are bound to be teething problems when the market starts functioning. However, this has paved the way for a more vibrant market for real estate. If you want to invest in real estate but don’t have deep pockets, you can consider REITs as the vehicle that can take you there.
Source: ET Wealth, 24th August 2014.
