Track2Realty Exclusive: There are analysts who believe the retail investors need to be exposed to this asset class through an institutionalized vehicle, which would be regulated. REITS is the ideal solution.
Om Chaudhary, CEO of Fire Capital asserts that in the USA, the domestic REIT market (public and private) is $300 billion or around 2.5 % of the GDP. Using that norm adjusted for purchasing power parity, the potential could well be Rs. 17,000 crore for REIT in India.
Here shortfalls in residential and commercial space are huge while there is no shortage of demand. As such the constraints on REIT can only emanate from inadequate supply position.
“Asia’s REIT markets went through a lot of turmoil in the nineties and have come out stronger. They have played a major role in not just getting the industry back on track but in taking it forward. It has been made possible by strong interest levels in the capital markets towards real estate as an asset class and also the enabling policy framework,” says Chaudhary.
However, Pradip Chopra, Chairman of PS Group puts the blame squarely at the policy level when he says REIT has not been able to make inroads into India because of the lack of regulatory support and lethargy and paralysis at the government level.
“World over real estate sector is raising funds through alternative investment funds like Real Estate Investment Trust. This enables retail investors to invest in real estate and also provide them the required liquidity which is not possible when they invest directly into real estate. Such funds are definitely benefiting sector also as it reduces their risk and requirement of costly bank and institutional funding,” says Chopra.
It is true that the success of REIT in other markets of Asia is the major encouragement for the introduction of REIT in India. It has re-shaped the real estate markets of countries like Japan, Singapore and Korea and generated strong public interest.
But real estate markets are far more evolved in these countries in terms of quality of real estate developments. Since India does not have REIT yet, the realty becomes less attractive for the global community to invest in.
However, Real Estate Investment Trust may not knock the Indian doors very soon, given the lack of regular, reliable data on property market trends and concerns that there lacks performance benchmarks to aid in investment performance evaluation and buyer decision making.
This is compounded by lack of well researched information by the Government of India and absence of a centralised property sales data bank at the local level. Indian property market stands too opaque for REIT where valuers use information from diverse sources ending up with differing opinions on property values and return projections.
The downside is that one has no control over the buying/selling/holding or managing it. The reason REITs are liquid is that they can be traded on major exchanges, making it easier to buy and sell REIT assets/shares than to buy and sell real estate properties in physical market.
However one must also consider the risks involved with overseas listing, a few of them are-
- Currency risk – Sudden changes in the exchange rates can drastically change the price of the asset.
- Legislative risk-Sudden changes in the regulatory and taxation frameworks.
- Lack of BT or business trust between the participating companies.
But recent developments of a health care business trust of Indian assets being listed on SGX suggests that companies are unfazed by the risks involved and are willing to employ unconventional financial instruments like REITs for better financing of their projects.
