All You Need To Know About REITs

Those who gave a lazy hearing to the announcement in 2014 that the government was initiating the process of setting up Real Estate Investment Trusts (REITs) in the country were all ears when Finance Minister Arun Jaitley in his Budget 2016-17 revealed his plans on various tax deductions.

“To stimulate housing activity... I propose that any distribution made out of income of SPV to the REITs and InvITs having specified shareholding will not be subjected to dividend distribution tax,” the minister announced. (SPV stands for special-purpose vehicle, while InvITs stand for infrastructure investment trusts.)

Jaitley's announcement had much to cheer those looking to make money in real estate, a time-tested asset class. If you are still wondering how it will work, PropGuide brings a primer on REITs:

• What's a REIT: These are companies that will own and operate commercial real estate by pooling in money from various stakeholders. To be set up as a 'trust' under the provisions of the Indian Trusts Act, 1882, a REIT will include parties like a trustee, sponsor, manager and principal valuer. A REIT will be allowed to raise funds without a prior registration with the Securities and Exchange Board of India (Sebi).

• Who can be a REIT? At the initial stage, the Centre will allow only established players — those with a minimum asset size of Rs 1,000 crore — to enter the market. To ensure enough liquidity, the minimum initial offer size has been set at Rs 250 crore. As an investor, you can look at a REIT as a good option if you have Rs 50,000 to put in.

Recently, Embassy Office Park launched India's first REIT. The three-day IPO was subscribed 2.58 times on the final day of bidding. It raised Rs 4,750 crore through the issue of units at Rs 300 a piece. It is likely to reduce its debt by 85 per cent after the issue. 

• Where does a REIT invest? According to the norms, a REIT must invest at least 90 per cent of its funds in completed revenue-generating properties; the remaining may be invested in under-construction properties, and other assets.

• How much of its profit does a REIT share with its investors? REITs are mandated to share 90 per cent of their profits with investors.

• Where will listed REITs trade? Much like mutual funds, listed REITs will be traded on stock exchanges; you will be able to track how your investment is faring in the market. And, unlike stock investments, long-term investments in REITs are expected to be much higher. You would also have an option to channel your money in different asset classes.

• Is there a lock-in period? While the conventional style of investing in real estate does not allow swift entries and exits, investing in a REIT will let you do that at the pace and time you like, without any wait.

• How many REITs will there be in the market? Real estate is a huge market and getting lost is highly likely. This would not be true when you invest in a REIT. To be set up under strict guidelines, REITs would be fewer in number and strong in character. Despite being similar to mutual funds, REITs will come without the volatility the former is subject to.