What is meant by REIT?

A couple of days ago SEBI gave companies with a corpus of 5 Crores permission to set up REIT. An acronym for real estate investment trust (pronounced as REETS). Two Indian companies Unitech and DLF are already in the process of setting up REIT that would be listed in the Singapore Stock Exchange. The concept of RIET was first formulated and introduced in 1960 in the NYSE (New York Stock Exchange). A REIT works like a combination of a property investment company and mutual fund. It works in the following manner.

The fund invests in buying a project resident/commercial/hotel and manages on behalf of its investors; the profit earned is distributed to its unit holders as dividend. In most western countries the operations are taxed on dividend with the companies’ income not being taxed. In the case of India SEBI is silent on this and has left the matter to be decided by CBDT (Central Board of Direct Taxes) as the matter is beyond the preview of SEBI. The various avenues for revenue earnings in REIT’s are:

1. Owning and leasing of properties both commercial and residential.
2. Buying and selling of commercial and residential properties.

The main advantages of investing in a REIT for a retail Investor are:

· It is a proxy for a retail investor to invest and get exposure to the property marked with out going through the trouble of having to locate and verifying the documents of a property.
· Whereas if an investor owns one property in one particular area in one city. He is locking most of his funds to one market. Whereas through a REIT, he hedges against such a risk.
· Most properties require a large amount of capital to be deployed. Whereas in the case of a REIT. The investor can invest small amounts like a mutual fund.
· REIT gives the small investor a chance to hedge against inflation. As property prices will appreciates at higher rates than inflation.

Types of REIT:

There are two types of REITS.
1. Equity REIT
2. Mortgage REIT

I. Equity REIT are REITs which are primary funds which primarily invest the corpus of this funds in specific projects in the mentioned sectors and profit from exploiting the various revenue streams out of that property
II. Mortgage REIT. In this type of funds the raised corpus is deployed in trading of real estate mortgages both residential and commercial.

A special fund is known as REMF, which is mutual fund investing in REITs has not yet been proved by SEBI. .

SEBI has mandated the following in its notification:

· REIT cannot invest more than 20% of its funds on unfinished projects
· All schemes have to be closed ended and must be listed in the stock exchanges
· Companies setting up REITs must have a net worth of 5 Crores and above.

To summarize SEBI has achieved the following:

a) Retail investors will have access to various types of property markets
b) Easier for promoters to sell their projects
c) It brings much needed liquidity to the property market.
d) Reliance on debt for funding of projects would come down.
-Keshav