Real Estate Investment Trust (REIT) History & Its Opportunity in India

REIT’s as a concept was first formalized in the USA in 1960. This was done with the intention of allowing small investors to participate in large scale income producing real estate asset the same way they invest in other asset classes.

Post implementation of REIT’s in USA, the world has caught the idea but only towards end of the last century. 3 Countries such as Australia, New Zealand and the Netherlands were early adopters and have grown significantly. But the last 10 years have seen a notable increase in the number of countries introducing the REIT concept. Today as per last count close to 36 countries have implemented the concept of REIT in varied forms.

In India it was implemented as late as 2014 and is yet to see a listing of the first REIT Entity. Globally REIT are mainly divided in three categories

1) Equity REIT: This form of equity mainly invests in the asset directly which produce income in form of rental income. own and invest directly in physical property. They typically derive their revenue from lease payments on the properties they hold. The REIT may also divest the asset at profit value and the same is passed on to investors as dividends.

2) Mortgage REIT: This form of equity mainly loan funds as mortgages to the property owners directly or in mortgage backed securities. Here the money made is in form of difference of interest earned and the operating expense.

3) Hybrid REIT: As name suggest, is REIT which has exposure in form equity and mortgage both.

Traditionally the Equity REIT make up at least 70% of the total REIT market. REIT’s have become increasingly popular form of investment for real estate ownership. As per report by EY, at the end of 2016, the Global market capitalization stands at 1.7 Trillion Dollars (*64 Lac Crore). Indian Economy is valued at around 2.4 Trillion Dollar. The interesting part is from 2010 to 2016, the growth of AUM has been 100% in all countries other than US, but during the same period the AUM has grown by 150%.

This number speaks a volume of investor interest in this form of asset class. Japan and Australia have seen the most action in the last decade and they now stand strongly now 2 and 3 in terms of Market capitalization under REIT. In the global context, India REIT market is in nascent stage and will need time to grow, but the potential is huge. As seen from example of Spain. Spain had introduced the concept of REIT but the industry struggled under the heavy taxation regime. But once the same was cleared, the industry has grown leaps and bound even in what can be considered as a struggling country economy.

In most of the mature economies, the return in form of dividend yield stands around 3 – 4%, but the cost of burrowing funds and inflation rate remains all time low in these countries. This also is one of the reason that the foreign funds are actively snapping up Indian Real Estate Asset, as good commercial asset offer close to 7- 9% yield along with healthy capital appreciation as well.

The Indian REIT regulation is broadly similar to the guidelines as suggested by US, UK and Singapore. Similar to Spain, there were tax regulation hindering the growth, which aftermarket representation have been revised but still many concerns remain for effective implementation.

Some of the key concerns are:

1) Minimum Asset Valuation for listing currently stand at around 74 Million Dollars (5000 Cr) of which 80% should be completed and rental generating.

2) Any REIT shall not have more than 49% of burrowing against the listing value, this is difficult to comply as majority of the funding currently is various forms of debt and listing through REIT is way to unlock capital and repay debt.

3) The Issue of asset transfer to REIT from the current holding remains the matter of taxation issue over and above the stamp duty attraction. Currently only share transfer is extended income tax break but the asset transfer still attracts income tax. Should they be extended only for REIT should be a great booster.

4) REIT provides that the area under lease should not exceed 20% to a particular tenant, this reduces the flexibility of the REIT to undertake sale and lease back proposition of single entity.

5) One another aspect is that any existing REIT cannot acquire new asset at less than 90% or more than 110% of the apprised valuation of the asset. This significantly under mines the purchasing power leverage for under stressed asset.

Once some of this concern are addressed, it is market waiting to be tapped by the investors landlord together. It has already been proved globally that is very efficient investment structure generating decent and stable returns in the long run.