Ring in the Reits
The recently introduced real estate investment trusts (Reits) have generated a huge cheer in the cash strapped sector, touted to benefit various entities, including investors, developers, mutual funds and others.
We Indians have always had a very special relationship with real estate in the traditional “roti, kapda aur makan” sense.
Whether it is about owning a house to live in or an investment property (generating regular rental income), we have always considered real estate as a “safe bet”.
While the fluctuating prices, reducing affordability and demand instability have affected this sector periodically, the general interest in a “self-owned house” remains intact.
This affiliation has amassed the interest of players from various industries, for a piece of this ever-evolving industry’s huge economic pie.
Sadly however, it has also led to many undesirable practices amongst the sectoral players, leading to a general distrust in the sector.
Therefore, how do you as an individual investor fit here and most importantly, should you bother at all?
For an individual investor, functioning as a landlord is tough in the property market as it comes with many strings attached. For one, investment in real estate comes with the prerequisite of having a huge budget.
Secondly, finding a commercial property in a good location, followed by finding good tenants is difficult. The tenants may not pay regularly or may, in some cases, damage the property.
Moreover, an owner always has the additional expenditure of maintaining the property regularly. However, with Reits, a person can surpass all these issues and ensure safe and profitable participation in this high growth sector.
Investor’s perspective: What makes these instruments so attractive?
Relatively low-ticket value: The minimum investment in this instrument is about Rs 200,000 with two trading units of Rs 100,000 each. This amount is much lower than what an average investor would pay to buy a property, which may cost lakhs or even crores.
Safety with benefit of investing in a world-class property: The funds are invested in properties on behalf of their investors, while the income generated is distributed to the investors in the form of dividends. Sebi guidelines stipulate that not less than 80 per cent of a Reits investments should be in completed and rent generating assets, for which generally only the Grade A projects (under construction and completed) are fully eligible.
These projects have good tenant profiles with long-term lease contracts in existence or in the pipeline, ensuring a regular stream of income and reducing risks.
This is unlike investment in a property where the investor is not assured of finding a good regular paying tenant, who will also take care of the property. In these instruments, an investor does not hold the properties directly and thus is not responsible for them.

SEBI regulated: These instruments are governed by the Sebi and are subject to its rules and regulations. The detailed guidelines not only define and state the requirements of entities involved, they also regulate their functions and code of conduct.
As all Reits have to be registered with the Sebi, it ensures that only credible entities/individuals are given the permission for setting up a Reit.
Sebi has also listed key investment conditions and properties that can and cannot be invested in, by the Reits. This makes these instruments safer than private investments in physical properties.

Regular tax-free income: The regulations mandate that at least 90 per cent of the net distributable cash flows of Reits should be distributed to the unit holders. This would guarantee a regular flow of income for the investor. As the capital value of the properties grow, the price of the units would also increase in the long term, giving investors reasonable capital growth. The dividend income is also exempted from tax in the hands of investors, making them very profitable.

Tradable assets and diversification: It is mandatory for the Reits to be listed on a recognised stock exchange within 12 working days of closure of the offer. This ensures liquidity, unlike in a physical property, which is not easy to sell off. With these tradable instruments, a person can choose to encash her/his investment or increase the size of the investment by buying more units in the market. These instruments invest in a relatively stable asset class (as compared to the equity market), thus offing diversification in portfolios. However, they do face volatility that is associated with the stock markets to a limited extent, as the Reits are listed.
Recently, the real estate sector has witnessed numerous economic changes, favorable for its growth. For example, The Real Estate Regulatory Authority (Rera), when adapted (in its intended spirit), will leave little room for developers to cheat customers, thus increasing their accountability.
The Benami Act will further ensure that all transactions in this sector are registered, including constructed properties and transactions.
Demonetisation of Rs 500 and Rs 1,000 currency notes is expected to reduce the sizable cash component, which forms a part of every deal in this sector. This will increase transparency, accountability and ownership in the sector, making it more efficient.
Availability of credit at reasonable rates from organised financial sources will further aid the sector expansion and the introduction of Reits in India.
While investing in the Reits, you should keep in mind that these are managed funds and are subject to various fees and charges such as management fees, maintenance charges, among others.
These charges are deducted from what you earn as an investor and lower your overall returns. Furthermore, as an investor, you will have very little or no say in which property the fund invests in or decides to sell, thus taking away the control that you would have if the property was yours.

Conclusion

We think that the various economic developments, advent of several multi-national companies, the increasing startup culture and its demand for office space will augur well for the real estate sector, and in turn the Reits. Introduction of these instruments will allow small investors to benefit from this sector in a safe manner.
(The writer is Partner, Mazars in India)