REITs - Smarter Way to Own Property

One of the most dreaded statements that Wealth Advisors come across from clients is “hum to apna paisa property me lagate hai” (I invest my money in property). Thanks to the pathetic performance of real estate market in last two years , such people regret their investment intelligence heavily. Some of the issues pertaining to investing in real estate market are as follows -

1. Big ticket size - typical investment in real estate may vary from 30 lakhs to 3 crore. Many a times it forms a very large chunk of one’s investment portfolio and hence make the portfolio quite risky
2. Illiquid - thanks to their big ticket size , real estate as an asset class becomes illiquid
3. Volatility - Real estate as an asset class is highly correlated with GDP growth rate , hence even a slight decrease in the same can ensure havoc for real estate market.
4. Management Requirement - Unlike other investment avenues, property needs constant engagement due to various government regulations, rules, taxes , utilities etc.
5. Ownership Risk - This is a kind of risk which is unique to Indian context. Remember the movie “Khosla ka Ghosla” ? For those who don’t, it means risk of somebody squatting on your property.
6. Possession Delays - Almost all real estate projects in India suffer from the inevitable delay in construction completion and hence delay in possession to investors.
7. High Transaction Costs - Property registration in different states costs 5-7% of the property value , which is a very high transaction costs and make regular buy-sell pretty expensive.

Add to these issues, regular issues of investments like knowledge gap, time needed to buy etc. and you manage to get a glimpse of how big maze is the process of buying a property.

Real Estate Investment Trusts (REITs) are an avenue that try to surmount most of the issues that plague Real Estate industry.

REITs mobilise money from retail investors and make investments in real estate from the corpus thus mobilised. In return they issue ‘Units’ to investors which can be bought and sold over stock markets. Last union budget brought renewed focus on this instrument by declaring a policy framework for them to operate in India.

Major characteristics of REITs are as follows -

1. Minimum investment of Rs. 2 lakhs by an investor -
1. Lower ticket size , hence more liquid and provides diversification by restricting the percentage of total portfolio in one asset.
2. Sponsors -
1. Required for floating the REIT in initial days.
2. An REIT can have a maximum of 3 sponsors , having at least 25% stake in assets - will ensure that sponsors skin is there in the investments so he will work in tandem to make REIT perform.  
3. Should hold assets for at least first three years of the REIT.
3. Manager -
1. Invests the corpus on behalf of investors based on his professional knowledge and decision making
2. Is responsible for the overall performance of the REIT.
4. Trustee -
1. Independent of Manager and Sponsor, ensures that all rules are followed and interests of investors are safeguarded.
5. Regulations -
1. To be regulated by SEBI , the same body that regulates stock markets in India

To ensure proper safeguard of investor interest govt has notified following rules -

1. At least 80% of the investments in completed projects
2. Investments to be in at least two projects
3. To be listed on stock exchanges for trading purpose
4. Minimum Rs. 250 crore for offering to retail investors to invest and minimum REIT size of Rs. 500 crore, so as to ensure that only serious players enter

So thanks to the way that they are  structured and their characteristics  REITs surmount all the major challenges faced by Real Estate investors.

In a nutshell , REITs bring professional management, diversification, strict regulations, liquidity and stability to real-estate investments , which has been for long marred by complete chaos. But being a novice product category , investors need to wait and watch before deciding their suitability.

Got a query on REIT or any other investment avenue? Drop an e-mail to healthynivesh@gmail.com. Like the Facebook Page Healthy Nivesh , so as to keep getting future posts as well. Keep sharing feedback and brickbats in comments :)