15 Aug 2018 19:09 IST

Why have REITs not taken off?

A success in countries such as Singapore and the US, they are yet to make a mark in India

Real estate is considered a lucrative investment despite recent challenges. But not everyone can afford to invest in property. To open this form of investment to all kinds of people, including those with small budgets, the Centre launched real estate investment trusts (REITs). An investor can buy property, earn income and hold a diversified portfolio with a minimum investment of ₹2 lakh. REITs also offer safety of investment. Nearly 80 per cent of the funds are invested in completed income-generating commercial properties.

They not only help investors but also realty companies. Realtors can depend less on banks for loans, repay any existing debts, and improve construction activities. But despite clarifying various regulatory logjams and bringing in transparency in the real estate market, REITs have not taken off as expected.

What is REIT?

REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties (usually commercial properties such as offices, shopping centres and hotels). The work of REITs is similar to mutual funds, where money is pooled from various parties and invested in properties making rental income. They are required to be listed in stock exchanges through initial public offerings, which means an investor can exit the fund any time. Though REITs are successful in countries such as Singapore and the US, they are yet to make a mark in India.

Key issues

Earlier, opacity in transactions was one of the main reasons why realty companies couldn’t launch REITs. With the introduction of Real Estate Regulatory Authority (RERA), the Centre has brought in the much-needed transparency in the market and clarified multiple aspects in REITs such as tax, regulations and investment requirements. Despite this, not a single REIT has been launched since the amendments.

Low rental yields dissuade companies from new launches. Though the performance of commercial properties is far better than the ailing residential segment, rental income generated is low compared to other countries, including emerging markets. According to a JLL report, Hong Kong commands the steepest office space rentals globally at $323 sq ft per year, followed by New York (Midtown) at $194 sq ft per year and London (West End) at $193 sq ft per year. In prime markets such as Delhi and Mumbai, office space is available at $147 and $100 sq ft per year respectively. Rental yields are much lower in cities such as Bengaluru and Hyderabad.

Other factors

Procedural delays, costs involved in land acquisition, construction and registration also play a part in the slow take off. According to a World Bank report (as per June 2017 numbers) that considers the steps, time and cost involved in registering a property, India ranks 154, while other emerging markets such as China (41), Malaysia (42) and Indonesia (102) do better. This has led to tepid investor appetite for REITs. Illiquid market conditions, mainly due to the slump in real estate, are yet another reason why REITs haven’t done well.

However, with the improvement of the real estate market, new project launches are on the rise. This could prompt the launch of REITs among developers. Given that most of the big players are debt-laden, REITs could be a way to change thisand improve project launches. Players such as Embassy Group plan to roll out a REIT this year as part of their rent yielding commercial assets. But pricing will remain the joker in the pack.