REITs may change investment landscape

This Week, we answer questions on real estate investment trusts. For investors and builders alike, the trusts offer scope for growth and returns.


How have REITs (Real Estate Investment Trusts fared in other countries, and how do they benefit?
The investment vehicle called REITs opens the option of investing in real estate portfolios to the common man. The concept has been established for decades in the United States and Australia (in case of the latter, under the name LPT, or Liquid Property Trust). Of late, Asia too is beginning to wake up to the potential. Singapore, Malaysia, South Korea and Japan have seen significant success levels with this financial instrument, while Taiwan is still trying to find a workable formula.

What sets REITs apart from other methods of investing in real estate?
REITs are attractive investment vehicles because they have the potential of generating higher yields than stocks and bonds. They are not prone to the kind of fluctuations one typically observes in the stock market and therefore present a higher margin of safety they also generate capital gains and represent a stable income source.

Can you explain the manner in which REITs work?
Fundamentally, a Real Estate Investment Trust (REIT) is an entity dedicated to owning and, in most cases, operating income-producing real estate such as apartments, shopping centres, hotels, offices and warehouses. This means that the company buys, develops, manages and sells real estate assets with the purpose of inviting investors to put their money into a professionally managed portfolio of properties. Investors are also given a tax exemption opportunity at the corporate level. In some cases, such an entity may even finance real estate. REITs is particularly an attractive option to retail investors because it offers higher returns than fixed deposit rates. They represent a diversified portfolio of assets at low investments. A REIT can serve as the ultimate landlord of select rented properties.

Will REITs work as well in India as in other countries?
REITs are yet to be proven a workable concept in India. As of now, there is no policy pertaining to the formation of REITs in this country any proposal to establish them will have to be placed before SEBI (Securities Exchange Board of India) for approval. This body will evaluate each proposal, and considering the immense potential, it stands to reason that a number of approvals will finally come through.

Assuming that they will launch in India, on which sectors will REITs focus?
REITs will concentrate on the following property market areas:
Ø Commercial: Offices and Parks
Ø Hospitality: Hotels, Leisure and Healthcare
Ø Retail: Large Malls
Ø Industrial
Ø Mixed use development sites, including residential

However, it should not be assumed that the introduction of REITs would result in availability of instant wealth-building instrument for investors. The product will be unfamiliar for most, and a long period of trial and error will precede the first REITs-related success stories in India.

Can anyone build wealth through REITs?
Maximizing profits through REITs calls for intelligent portfolio diversification a lot depends on the format that REITs take in India. To generate good financial returns, the entity will have to own a high-quality investment portfolio. Ideally, it will operate in several metropolitan and secondary cities. The returns will begin to flow when the company manages to partner and complete several large quality developments and maintain the quality of portfolio components.

If and when REITs become a part of the Indian investment scenario, it will provide significant advantages to investors. The returns are passed on to the investor regularly, and there is next to no scope for bureaucratic ambiguity in the process. This is in direct contrast to the pitfalls inherent in direct investment in real estate. The REITs vehicle will ease the process of investing in a healthily diversified real estate portfolio and make it a realistic option for lay investors and professionals alike. REITs will also serve as a significant market stabilizer in the medium to long term.


Courtesy: HT March 17, 2008