REITs-The new kid on the block

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: The fast-paced real estate industry is in for yet another transformation that could mark the beginning of a new era, a new capital market structure and a new dimension to an individual’s portfolio—a portfolio that is just not limited to a few securities, but one which in itself talks of ownership of real estate properties.

To be termed as I-REITS (Indian-Real Estate Investment Trusts), this new investment vehicle will enable investors to reap benefits of the growing real estate market without having to go through the present cumbersome process of buying, selling and liquidating real estate properties. This in turn could re-rate the real estate market in the present risk domain.

This investment tool, by virtue of its typical characteristics, may lead Indian real estate players to reinvent their business models and generate new revenue streams. REITs will offer a diversified portfolio, generating stable incomes and also provide instant liquidity. In this regard, SEBI has introduced a draft regulation, which has some peculiarities that require a closer look to ensure clarity. For instance, one of the most prominent corner stones of the regulation is that it permits only close-ended schemes, which will impact the ability of the trust for new acquisitions. Further, the regulation restricts the areas of operations of the trust towards its avenues of revenue from ‘real estate rental income’ or ‘capital gains’.

The regulations from an accounting perspective provides for ‘accounts of the scheme’ to be drawn up in accordance with the accounting norms which are yet to be specified by SEBI. The most significant issue that will confront the REIT will be the valuation of its properties. As SEBI’s regulation provides for real estate properties to be held for rentals and capital appreciation, the investments by the trust are more likely to classify as investment property as defined under IAS-40. The standard prescribes investment property to be measured initially at its cost. For subsequent measurement, the standard permits entities to choose either the fair value model or the cost model.

In case the fair value model is used, it will have significant amount of impact on the profit and loss of the trust because of changes in the fair value of the property. Further, a fair valuation of the various properties every quarter, as required, could involve costs, which may be significant and shall be ultimately borne by the unit holders.