How realty and retail investors will gain from Real Estate Investment Trusts

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Published: April 7, 2017 4:49:03 PM

The Reserve Bank of India’s move to allow banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) is being viewed by industry experts as a huge positive for the real estate sector.

According to him, banks will have an opportunity to diversify their investment portfolios and participate in a new asset class in a very efficient manner.

The Reserve Bank of India’s move to allow banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) is being viewed by industry experts as a huge positive for the real estate sector. According to them, the involvement of banks will help commercial realty by bringing in much-needed liquidity, which will set the momentum going for REIT, which has not taken off yet despite having huge potential.

“While clarity from the RBI will be forthcoming over the next few months, the move to allow banks to invest up to 20% of their Net-Owned Funds is a very positive move for both the eventual success of REITs as well as for banks,” says Gagan Randev, National Director, Capital Markets & Investment Services, Colliers International India.

According to him, banks will have an opportunity to diversify their investment portfolios and participate in a new asset class in a very efficient manner. Banks anyways have superior insights on trends of interest rates and yield curves and this would allow them to up their portfolio returns. Now the future of REITs would get a big boost by getting a new investor class with deep pockets and allow the advent of domestic investors along with the typical foreign funds which are attracted to REITs.

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Ganesh Vasudevan, CEO, Indiaproperty.com, is also of the view that the RBI’s move to allow banks to invest in REITs as well as InvITs would benefit all the parties involved in the real estate sector. “Developers would get liquidity, banks would get an alternate asset class to invest, and common man would now be able to invest in high ticket commercial real estate. Since interest rates are falling, this move would give banks an alternate, yet less-risky vehicle to park their funds,” he says.

In India we have close to 1.73 billion sq ft commercial real estate (CRE) across top cities. Most of the times for an end user, investing in commercial real estate is not feasible as it is not only expensive but also involves high risk. Also, commercial properties available for sale to retail investors are very few. So they are limited to investing in residential real estate only. With REITs now they will be able to make small ticket investments in CRE, the same way they invest in mutual funds. Many more consumers would be able to participate.
REIT is based on returns from rent yielding completed commercial property and has globally proven to be a less risky investment. Investors would now be able to get periodic returns by investing in a safe and moderate yielding investment trust. Globally traded REITs have given better returns to investors compared to stock market investments.
“With more institutional investors like banks investing in REITs and InvITs, over the years it is expected that the supply constraint for CRE in big cities would ease out. Since liquidity in the sector would increase, supply is also expected to increase. This increase in supply would help end consumers as they will get access to more property at prime locations to rent. Overall REITs would help boost the realty industry in India by making more funds available for the sector,” Vasudevan says.

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According to a JLL India report, retail investors are already excited at the new and easier real estate investment opportunity that REITs would open up for them. However, clarity on how big or small the ticket sizes turn out to be for them would emerge only after the first two or three REITs have been listed.

It says a smooth ride after the first REIT listing, which is expected to take place in the first half this year, will help retail investors become comfortable with this new investment avenue. However, it would be necessary to educate first-time investors about this platform, and sustained efforts to create awareness around REITs would be required.

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