The real estate sector is one of the booming industries in the Indian market. Till recently though, it had been in deep water due to shortage of funds. Nabil Patel Director DB Realty and other real estate veterans in India had also expressed concern that the sector could continue to feel the heat of liquidity issues well into the near future due to global credit crunch and unfavourable stock market conditions for raising capital. Even bankers have been getting more cautious towards lending to real estate developers.
Taking note of this crisis, Confederation of Real Estate Developers Association of India (CREDAI) has come up with a solution to improve the situation. It has suggested that the Union Government allow investments in residential projects through real estate investment trusts (REITs). Cutting through all the odds, the launch of the first Real Estate Investment Trust (REIT) of India and its initial public offering (IPO) have brought a new ray of hopes for the cash-strapped Indian Real Estate market.
So what is Real Estate Investment Trust? It refers to a company that owns or finances income-producing real estate across a range of property sectors. To be eligible to be claimed as a REIT, a company should invest 75 percent of its total assets in real estate and pay at least 90 percent of the taxable income in the form of dividends to the shareholders. Most of the REITs usually trade on major stock exchanges, offering multiple benefits to investors.
REITs would aid developers in improving their liquidity by unlocking the value of their assets to raise capital. It is a highly risk-free investment route for big and small investors alike, offering annual returns of as much as 12-14 per cent over the long-term, which is quite an attractive proposition given the current credit situation.
Industry experts project that real estate developers may raise over $25 billion in the next three years by listing their rent-yielding commercial properties through REITs. In the medium term, REITs would also aid in building confidence amongst global investors and encourage global leaders for considering India along with other global peers.
Soon after its launch in India, REIT has received approval from several private equity firms. Owners of these firms believe that the oversubscription of REIT is an indication that it will fuel the real estate sector and especially the commercial real estate sector. With REIT in place, several retail investors are now confident about purchasing and investing in the Indian commercial real estate sector.
As an investment tool, therefore, REIT looks poised to trigger a new wave of market opportunities with higher availability of investments and funds for the Indian real estate sector. Nabil Yusuf Patel and his industry peers are expecting REIT to boost demand for office space from the IT hubs, marketing industries, logistic sectors, as well as financial and banking institutions.