REIT Brings More Stability to The Indian Investment Property Sector

The Real Estate Investment Trust is meant to improve India’s property industry and offer better industry stability.

Investors were waiting for a very long time for the approval of the legislation which allows the REIT to be founded. This Investment Trust is designed to inspire the constitution of big institutional grade buildings and provide developers with a way of starting new and ambitious projects.

Maybe until not some institutional investors might have been a little bit reluctant about investing in Indian properties due to its fragmented nature. For example, different members of a large family can own and share the same building.

The main rules for the Real Estate Investment Trust are very similar to the ones of the REIT legislation from other Asian countries, like Hong Kong and Singapore- as the Securities and Exchange Board of India (SEBI) has declared.

The discussions about creating REIT begun in 2008, but no actions were taken in this direction. Many believe that those who made it possible were the new Prime Minister Narendra Modi and his BJP party, after issuing a consultation paper in October 2013.

The new approach of the government is to be business friendly and to develop policies that can be immediately applied for perfecting the investment sector.

The primary role of the Indian REIT, as for most of the others Real Estate Investment Trusts located around the world, is to pay investors about 90% of its income from stable assets. The effect of this is a twice yearly dividend. 80% of the funds of the Indian REIT ‘s assets need to be invested in income generating property while the remaining 20% can be used for development investments, which represents the riskiest result of the real estate industry.

Considering that those projects that are usually shopping malls or buildings have already been developed and populated with tenants, it is really easy to predict their income stream. The REIT will not trade them in and out of real estate, it will prefer to hold them long term even though they may increase in value.

These are meant for investors who want to count on steady returns as opposed to capital appreciation. This was surely not designed for speculators.

It is necessary that any building folded into a REIT has a single ownership just as it is needed for the buildings to have multiple tenants to reduce the risk to only one company. Also, the REIT needs to hold more than one building, and should not have more than 60% of its assets in only one project. It should own assets of US$82 million when it officially starts its operations and its initial stock exchange listing needs to be US$41 million.

Stable assets can be now easily accessed also by overseas investors via REIT. India has 370 million square feet Grade A office stock and about 170 million corresponds to REIT’s standards.

There is also a new created infrastructure investment trust, similar to REIT  in structure that offers the possibility to developers of infrastructure projects to sell those into a fund, and it also implies the distribution of 90% of the profits twice a year.

Overseas investors will consider the current REIT legislation as very appealing as it implies only 5% on capital gains, with untaxed dividends. On the other hand, Indian investors are required to pay 420% or more as corporate taxes.

The REIT rules will be perfected as the industry continues to develop.

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