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The concept of a Real Estate Investment Trust (REIT) is on the verge of introduction in India. But like most other novel financial instruments, there should be no problems for this new concept to be accepted after the initial teething period.
What is REIT?
REIT is a company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centers, offices and warehouses. Just like gold that can be bought and sold as a mutual fund, REIT would channelise equity funding in the real estate sector. Once REITs are allowed in the Indian market, they would become a medium of convenient investment for developers and small investors intending to invest in real estate. A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to
invest in a professionally managed portfolio of properties. Some REITs also are engaged in financing real estate. REITs are pass-through entities or companies that are able to distribute the majority of income cash flows to investors, without taxation, at the corporate level. The main purpose is to pass the profits to the investors,
The advantages
There are many distinct advantages of investing in real estate via the REIT route. First, the returns are passed on to the investor with transparency of transaction and regularity, as opposed to direct investment, where a builder may or may not pass the returns on to the investor or delay the procedure for various reasons. These could be for purposes of maintaining liquidity or siphoning the funds to other on going project.
Second, it takes the cumbersome effort out of investing in a large diversified real estate portfolio, with the right product mix, that ensures greater returns.
Third, the investor need not worry about his/her lack of local property knowledge and can invest in real estate, across cities.
Fourth, with this corporate avatar of real estate investment, the foreign investors fears of investing in an alien unorganized market will be allayed.
Fifth, the advent of the REIT will also help reduce the volatility of the market in general.
And lastly, they are relatively high yielding when compared to other forms of real estate investment.
How it works
In America, REITS have been a principle player for investments into real estate and gives common investors the opportunity to invest. In India, if you want to invest Rs. 1.000 to Rs. 10,000 today, you cannot invest in real estate but in shares or in mutual funds. The idea of forming REITs in India is to bring this kind of retail investor money to come into real estate. But these REITs need to be professionally managed and help bring liquidity into the sector. REITs will do very well because of the fact that a lot of capital is required in real estate and affiliated infrastructure. The government has been very cautious on giving permission on this but for a few institutions like ICICI Ventures Real Estate Fund and HDFC Realty Fund. But the initial cap for investment is quite high (generally meant for large size investors). With ICICI Ventures Rs. 5,000 crores can be invested in the Indian real estate sector. HBFC (80 per cent) in collaboration with SBI (20 per cent) has launched HDFC Venture Capital Ltd. These funds will be invested in debt and equity instruments of real estate firms. The launch of venture capitals in India is due to the changed norms for venture capital investments in the country. The Securities and Exchange Bank of India recently removed real estate from the list of sectors where venture funds were not allowed to invest. The
minimum investment limit is five crore rupees with a lock in period of seven years. No exit will be allowed in these seven years. Since the government has allowed Foreign Direct Investment in real estate more capital funds are expected to come up.
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