Real estate investment trust

Table of Contents:
Definition of real estate Types of real estate investments Indian real estate Problems in real estate investment Launching REITs for Indian real estate Definition of REITs Properties coming under REITs Overview of typical REITs Requirements of REITs Types of REITs Advantages of REITs REITs by Indian firms Issues in launching REITs in India

Definition of real estate:

Land and anything fixed, immovable, or permanently attached to it such as appurtenances, buildings, fences, fixtures, improvements, roads, shrubs and trees (but not growing crops), sewers, structures, utility systems, and walls. Title to real estate normally includes title to air rights, mineral rights, and surface rights which can be bought, leased, sold, or transferred together or separately.

Types of real estate investment:

Residential real estate

Commercial real estate

Industrial real estate Retail real estate Mixed up real estate Real estate investment trusts(REITs)

Indian real estate:

Real estate contributes 5% to Indias Gross Domestic Product or GDP. The total revenue generated from the real estate sector in 2010-11 stood at US$ 66.8 billion. Demand for real estate expected to grow at a CAGR of 19% between 2010 and 2014, with metropolitan cities projected to account for about 40% of this. The Indian real estate market size is expected to touch US$ 180 billion by 2020. The report estimates that the sale of new residential apartments in smaller cities are at around US$ 4 billion in 2013.

 India needs to invest US$ 1.2 trillion over next 20 years to modernise urban infrastructure and keep pace with the growing urbanisation, as per a report released by McKinsey Global Institute (MGI)-India's urban awakening.

Foreign direct investment (FDI) inflows in real estate in 201112 (April-January) stood at Rs 2,750 crore (US$ 499.59 million). In fact, FDI in the sector is expected to increase to US$ 25 billion in the next 10 years, as per a latest industry body report.

Problems in Indian real estate:

Huge capital investment is required.
Liquidity problems. Waiting for long time for returns. No stringent comparison methodologies. High legal compliances.

Real estate mafia.

Black money generation.

Launching REITs For India's Real Estate

The Indian government has realized that Indias real estate is a key component of economic growth and is on the verge of second boom. There are many issues with Indias real estate sector structure especially in financing. The Government of India, in collaboration with the Associated Chambers of Commerce and Industry (ASSOCHAM) and SEBI is working on feasibility of introducing India Real Estate Investment Trusts which would be similar in structure, operation, and regulation to the Indian Mutual Fund industry

What is an REIT?
An REIT(Real Estate Investment Trust), first introduced in the US in 1962, is a corporate structure which invests its assets in real estate holdings.
This trust was created to offer a helping hand to that section of the American public whose buying capacity was lower in comparison to the prevalent real estate prices. REITs distribute the profits earned through generation of rental income (more than 90% of annual income) to their investors in the form of dividends.

 REIT must distribute at least 90% of EPS

Investors can buy REIT stocks just like mutual funds. When REITs get income by renting properties, the income will be distributed to investors as dividends. REIT will enable investors to participate in real estate sector without investing large chunk of money.

Properties coming under REITs

Business premises Shopping malls Entertainment facilities Health care facilities Hotels

Overview of a typical REITs

Requirements of REITs
Assets
75% of assets must be real estate, cash, and govt. securities

Income
95% of gross income must be from dividends, interest, rents, or gains from sale of certain assets (real estate, cash, or government securities). 75% of gross income must be derived from rents, interest on mortgages, gains from sale of certain assets, or income from other REITs

Requirements

Income
No more than 30% of gross income can be derived from
sale or disposition of securities held less than 6 months sale or disposition of real estate held for less than 4 years

Distribution
must distribute 90% of all taxable income to investors
mandates fairly low retained earnings policy

Other requirements
In addition to the requirements noted above, REITs must also:
- Be structured as a corporation, trust, or association;

- Be managed by a board of directors or trustees;

- Not be a financial institution or an insurance company; - Be jointly owned by 100 persons or more; - Have no more than 50% of the shares be held by five or fewer individuals

Types of REITs:
Equity REITs

Mortgage REITs
Hybrid REITs

Types of REITs:
Another base of classification is-

Open ended and close ended REITs

Listed and unlisted REITs

Advantages of REITs
Higher yields Attracts small investors Tax benefits Protection against inflation

Protection against mafia

Liquidity for REITs shares Reduces the risk in portfolio investment with high returns

Problems in REITs:
Possible conflicts of interest between sponsors and REIT shareholders

No tax benefits to the investor

No funds for future investment

REITs by Indian firms

Absence of REIT in India has not stopped Indian companies take advantage of listing in foreign shore for raising fund. India bulls is in Singapore.

ING has mutual funds that invest in REITs.

Apart from these cases, there are many, like ICICI, who want to list REIT companies. These companies will bring them as soon as RBI & SEBI clears the REIT proposition.

Issues with launching REITs in India:

SEBI has outlined draft regulations for REAL Estate Investment trusts in December 2007 but due to some issues it took back seats. Main issues are Launch of REITs in India has been delayed because SEBI feels that Indian property markets lack depth and liquidity required for proper functioning of REITs.

No proper valuation models

 Weak legal structure Non uniform state taxes, title issues with land and stamp duty on every sale and purchase which can effect IRR that is Internal Rate of Return(the discount rate at which sum of your cash flows equals the initial cash investment) of REITs.
Lack of trained employee base REITs require asset and portfolio management expertise along with development and leasing expertise whereas in India there is no Real Estate education at corporate or university level and is not looked as a career option.

Conclusion:
Finally Real Estate Investment Trust (REIT) must be allowed in Indian market.

Even though there are some issues of suitability of REITs to Indian real estate, it is wise to build up each element over time before initiating REITs in India. And provide the small investors with a new option of investment to their portfolio which has low risk component with high returns

References:
Websites: Articles: www.investopedia.com Economic Times www.moneybuddy.com Indian Express(23/6/12) www.busmapsofindia.com www.reitwricks.com

Learning experience
Learnt a little about the field of real estate Some knowledge about REITs

Conversion of data into systematic information