What is REIT?
REITs or Real Estate
Investment Trusts are a special type of investment vehicle
which operate more like mutual funds but invest in real estate properties for
returns. These properties are usually income generating properties, commercial
or residential, and the returns from such investments are passed on to the investors
in the REITs. Usually REITs' units, issued by fund houses, are traded on
the bourses and investors can buy and sell those units like stocks. In India,
market regulator is in the process of formulating rules for launching REITs in
India. Real estate is a big ticket investment with a huge chuck of money
getting locked in buying a property. The advantage of REIT is availability of
exposure to real estate with a smaller ticket size as well as diversification
of investment by REIT. The various types of REITs include equity, mortgage and
hybrid ones.
To ensure that only established players launch REITs, the
minimum size of assets under management has been proposed as Rs 1,000 crore.
Initially, the minimum investment size will be Rs 2 lakh, which may keep retail
investors away from this new market. Units of a REIT are compulsorily required
to be listed on a recognized stock exchange. At least 90% value of REIT assets
should be in ready properties generating revenue. The remaining 10% can be in
other specified assets. REITs will have to distribute at least 90% of their net
distributable income after tax to investors.
Parties involved:
The parties in the REIT include the sponsor, the manager,
the trustee, the principal valuer and the investors / unit holders. Sponsor
sets up the REIT, which is managed by the manager. The trustee holds the
property in its name on behalf of the investors. The roles, responsibilities,
minimum eligibility criteria and qualification requirements for each of the
abovementioned parties are detailed in the Draft Regulations. Sponsors are
required to hold a minimum of 15% (25% for the first 3 years) of the total
outstanding units of the REIT at all times to demonstrate skin-in-the-game.
Use of SPV: REITs may hold assets directly or through an
SPV. All entities in which REITs control majority interest qualify as an SPV
for the purpose of the Draft Regulations.
Benefits:
- REITs provide the sponsor (usually a developer or a private equity fund) an exit opportunity thus giving liquidity and enable them to invest in other projects
- It provides the investors with an avenue to invest in rental income generating properties in which they would have otherwise not been able to invest, and which is less risky compared to under-construction properties.
- IT brings in increased transparency in the sector by adopting better corporate governance, disclosures and financial transparency practices
- It will also provide a vehicle for addressing non-performing assets (NPAs) including sick or defunct companies holding large land banks. Sale of such NPAs to REITs will have a twofold effect—realization of the real estate’s true value and ease in liquidating the NPA once the high value of the real estate is removed from its books.
Don't you think investing in NPAs will be riskier for investors in REITs? Do you think REITs are more specialised than banks in handling NPAs?
ReplyDeleteI think there is a slight confusion in you about NPAs and actual assets pledged by NPAs. NPA is formed when a borrower's interest/installment on loan is due for a period more than 90 days. And there will be an asset that will be pledged by him while borrowing which can be sold to REIT. The value of the asset is market determined and NPA is borrower's inability to make repayment of interest or installment. Banks sell those assets to realize the value of the asset pledged so that they can write off the NPA. So I think there is no scope for REITs to manage NPAs because they don't come under their umbrella at all.
ReplyDeleteThanks for clarification.. So you mean to say the assets pledged by NPAs which fall under category of Real estates might be bought by REITs?
ReplyDeleteexactly!
DeleteThank you..
ReplyDelete