REITS & Its Impact On Economies Around The World
Real Estate Investment Trust (REIT) became a reality in India in 2014, when the government gave an approval for its formation. Since then, not many efforts have been made to promote investment in such trusts, showcasing them as convenient. Though the government and the Securities and Exchange Board of India (Sebi) have come out with various notifications to make the process of investment easier for domestic investors, foreign direct investors, listed real estate companies and mutual funds, the tax anomalies have kept most of them away.
However, other economies across the world, where property market may or may not be performing well, offer lucrative operating trusts. These investment trusts have successfully managed to give good returns to the investors.
PropGuide takes you through how REITs have performed in other key economies:
The US
REITs are one of the most sought-after form of real estate investment among American investors. These have been giving an average of three per cent returns to investors. Trusts in the US largely operate in building malls, shopping centres, multi-family housing, student housing, apartments, etc. So, what makes REITs in the US an important lesson for the Indian counterparts? According to Ernst & Young (EY) , the total economic contribution of the US REITs in 2014 was an estimated $1.8 million full-time equivalent jobs and $107.5 billion of labour income. The total economic contribution of REITs includes direct operations of REITs and related businesses in the country, as well as the impact from dividend and interest payments by trusts and property improvement and construction investments. The related construction activity supported 366,000 construction jobs that earned $23 billion in labour income. Purchases of goods from suppliers and consumer spending by construction and supplier employees contributed an estimated 555,000 FTE jobs.
The UK
After the famous Brexit, the UK capital London might be dethroned as the financial capital of the world. One of the most expensive office markets, Midtown and West End, where the occupancy has remained 95 per cent, might suffer due to job losses that are expected to go into five digits. The UK REITs have remained one of the most popular propositions for the investors while things are likely to change after the Brexit expected to happen in March 2019. There was a time when the interests and dividends from REITs went up to 7.5 per cent, which are now expected to go down to 5.3 per cent after the vote out. According to latest reports, Land Securities, the UK's largest REIT, has announced that would not start any new London offices without securing tenants in advance. An clear example of how skeptical the investors are. Like many of its rivals, including British Land and Great Portland Estates, it has also been selling large buildings to reduce debt and raise cash for purchases when prices fall.
Australia
Very similar to the US, the Australian REITs are also popular. The biggest benefit that investors get here is the geographical diversification. These trusts can hold property domestically and internationally. Few trusts also allow property asset class diversification that includes office, industrial, retail, and hotel and leisure. This results in spreading of risk across the portfolio as the property value cycles are driven by different underlying economic fundamentals in each sector. Australian public real estate sector consists of a total market capitalization of almost €92.5 billion, accounting for 9.36 per cent of the global real estate investment trust (REIT) market capitalization. Also, Australia enjoys one of the globally highest levels of transparency in its property market with the development of the local REIT market being a key contributor.
Netherland
The country ranks among top five countries for transparency in real estate investment and a due credit goes to REITs. However, these trusts have recently taken a hit because of series of policy changes announced by the government. Earlier, Dutch REITs did not have to pay company taxes if their full-year profit was paid out as a dividend. The idea behind this was that the profit would then be taxed at 15 per cent, via dividend taxes. According to the recent changes, the government has implied tax on profits of 16 per cent on profits up to €200,000 and 21 per cent on the profits over €200,000.