India?s demographic dynamics and growing urbanisation have led to a rising demand for residential and commercial real estate space. To be able to meet this increasing demand, the capital-intensive real estate sector requires large-scale investments, but faces a severe constraint in terms of adequate and structured financing options. Real Estate Investment Trusts (REITs) can help bridge this gap by attracting and effectively managing investments in real estate and enhancing the transparency levels in the sector.
As per the latest census, India?s urban population has grown from 290 million in 2001 to 377 million in 2011, accounting for over 30% of the country?s population. This unprecedented urban growth is likely to continue. Consider this?more than 300 million people are expected to be added to India?s working age population by the year 2050. Needless to say, this would add to growing urbanisation and the need for providing housing/accommodation facilities for this section, including the swelling number of women in the workforce.
According to the UN estimates, India has the highest urban population rate of change among the BRIC nations. At this rate, an estimated 843 million people will live in Indian cities by the year 2050?which is about the same as the combined population of the US, Brazil, Russia, Japan and Germany.
India?s steadily increasing population and urbanisation has created an enormous pressure on the demand for quality real estate. However, despite its significance and the growth in demand, the Indian real estate sector continues to be largely unorganised with very few corporate or large players. Lack of transparency and information, dubious land records, high transaction costs, land ceilings, restrictive legislation and lack of adequate capital funding continue to be impediments to the growth of this sector.
It is in this context that REITs can play a significant role in real estate development and management and bringing transparency to the sector. There is a strong, positive relationship between transparency and real estate investment volumes. Availability of real estate financing from more structured, institutional sources such as REITs helps in reducing the over dependence on a particular means of financing and requires enhanced disclosure and thus increases transparency.
Second, REITs are registered with the concerned regulatory body of the country, for instance the Securities and Exchange Commission in the case of the US. They are thus subject to stringent regulations and monitoring by the regulator. Further, REITs are required to comply with corporate governance, information disclosure and financial reporting standards laid down by the Regulator. In this sense, there is a regular information exchange and availability of information in the public domain. REITs bring more professionalism. There is a clear emphasis on issues such as reducing risks attached to title in property and minimising transaction costs.
Another advantage that REITs offer is that of allowing small scale investors the opportunity to access returns from real estate, currently unavailable without significant capital outlays. They provide a more liquid component to the current range of property investment vehicles and improve investors? investment profile through diversification of investment base and increasing stability of income source. REITs usually provide a good hedge against inflation as the rentals, i.e. the underlying income, adjust themselves in line with the cost of living.
REITs as an investment vehicle have become popular across a number of countries, including Australia, France, Japan, Singapore, Hong Kong, China, the US and the UK, who have developed their REIT frameworks and brought about reforms in the property market by helping to promote greater liquidity, more efficient investment decisions, wider access to smaller investors and improved supply of housing through greater institutional investor participation in the residential market. REITs provide competitive long-term rates of return that complement the returns from other shares and bonds.
Sebi, recognising the crucial role that REITs could play as an investment vehicle, had brought out draft REITs regulations in December 2007 to encourage and facilitate a healthy growth of REITs in India. While introducing the draft regulations, Sebi acknowledged that REITs provide better access to stable, global and more competitively priced capital, as well as stronger and more professional property businesses. Further, they help the real estate business by creating conditions for building integrated property businesses. REITs can become the investment vehicle of choice for institutional and retail investors looking to participate in real estate ownership, management and development. They provide a similar structure for investors buying into real estate as mutual funds provide for investment in stocks.
To provide an enabling regulatory environment for allowing REITs and to provide a boost to the Indian real estate sector, Sebi should finalise and announce the REITs Regulations. Sebi may even consider modifying the existing Sebi (Collective Investment Schemes) Regulations, 1999, to facilitate REITs, after providing for due safeguards such as restrictions on borrowings by REITs and specific accounting and disclosure guidelines/ norms for REITs. For the purposes of taxation, the units of listed REITs should be treated at par with listed shares and granted exemption on long-term capital gains. Also, the listed and widely held REITs should be granted a pass through status and taxation should be at the investor level.
Globally, REITs as an investment vehicle have become popular across a number of countries. Given the investment requirements of the Indian real estate sector, REITs regulations should be implemented with requisite amendments and safeguards, keeping in perspective the dynamics of our economy.
The author is group general manager & country head, HSBC India, and president, FICCI
