Making REITs a success story

Aug 29 2014, 01:54 IST
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SummaryIt is critical to provide for investor education about REITs as an investment product

Real Estate Investment Trusts (REITs) were introduced in the US markets in 1960 as a vehicle that allowed investors to participate in large-scale diversified portfolio of income generating real estate assets, much like they would invest in other listed securities such as debt or equity instruments. Their introduction in India marks the coming of age of the real estate sector and is a recognition of the fact that there is enough stock of real estate assets which are REIT-able in India. A REIT is a trust that acts as a pooling vehicle through which capital is deployed to own real estate assets. Its objective is to provide a steady source of annuity income in the nature of rent from ownership of assets. Real estate as an asset class has traditionally given returns above inflation, thus acting as a good hedge against inflation for the investor. REIT is the vehicle of choice that provides the investor an ability to participate in the real estate ownership with a low ticket size of investment and, at the same time, gain from the large and diversified corpus of a REIT as opposed to having a single asset exposure.

The growth in the middle and high networth class of India has resulted in a growing demand for investment products that provide annuity returns. The universe of investment products available to an average investor in India is restricted. It is either a low-risk product such as a bank deposit or tax-free bonds, or a high-risk product such as equity, and the moderation of the risk profile is achieved by investing through mutual funds. Real estate as an investment product is somewhere in the middle as it provides opportunity for capital appreciation in addition to recurring annuity income in the form of rent. But the average investment size for investing in real estate is very high, being a function of capital value and size of the real estate which makes it inaccessible for the wider diaspora. The lack of an institutional buyer or seller market for such types of real estate assets makes them unviable for institutional capital to participate. Therefore, introduction of REITs as an investment product is a step in the right direction to address the investment needs of the wider working population.

Take the example of the Indian employee provident fund, which has a corpus of $68 billion, ranks 39 in the list of top 300

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