REITs on the way
January 7, 2008
|Black and grey|
What the draft regulations speak of and what they don't.
- REITs cannot acquire vacant land
- Individuals cannot act as trustees of a REIT, only companies can
- REITs should have close-ended schemes
- Schemes of REITs to be managed by REIMCs
- Managements of REITs and REIMCs to be independent of each other
- Borrowings should not exceed 20 per cent of the value of total assets under the scheme
- Taxation norms for REITs
- Transaction costs like stamp duties etc., which could impact returns
- The actual method of assessment and appraisal of a property
- Compulsory termination of a scheme upon expiry makes them rigid
- Absence of regulatory framework supporting foreign investments in REITs
- Lack of proper definition of net worth as applicable to a trust
For all those who have been left ruing the missed investment opportunities in the country’s booming real estate market, market regulator SEBI played Santa this Christmas and provided a glimmer of hope with its proposal to set up Real Estate Investment Trusts (REITs) that will allow retail investors to participate in the property market in a few months.
According to SEBI’s draft regulations, like mutual funds, REITs will use collective funds for owning and managing investments in real estate projects.
They will be managed by a separate real estate investment management company and will be required to distribute 90 per cent of their annual income as dividends. As safeguards, strict limits have been proposed on investments and borrowing by REITs.
Says G.R.K. Reddy, CMD, MARG, a construction company: “The regulations favour the investor by helping them channelise their savings into real estate in a safe mode. As REITs will invest only in developed properties, there will be zero speculation and this will help protect investor in a volatile scenario.”
He also points out that REITs will help investors to hedge against inflation, earn higher and consistent returns and also provide ease of exit.
On the flip side though, SEBI has yet to spell out tax rules and standard assessment values for REITs.
Ramesh Nair, Managing Director, Jones Lang Lasalle Meghraj, Chennai, has a word of advice for investors.
“REITs should be treated as a long-term investment and retail investors need to know about the company they are dealing with,” he says.
Overall, REITs look like offering a complete package that make investing attractive for retail investors—low volatility, good dividends, convenient liquidity and professional management.
— Nitya Varadarajan