REITs to draw retail participation, do away with black money

Block by block

Rs 1.5 lakh crore-- assets that may come under REITs
90% net distributable cash flows would go to investors

The Securities and Exchange Board of India's (Sebi) approval to set up real estate investment trusts (REITs) will now establish a direct co-relation between rentals and real estate prices of commercial properties, and arrest the generation of black money in the time to come.

In addition to this, Sebi also approved Infrastructure Investments Trusts (InvITs) for raising funds for roads, ports and other infrastructure projects that have reached 50% completion.

In both the cases, the market regulator said the trusts should distribute at least 90% of net distributable cash flows to investors on a half-yearly basis.

Two aspects come to fore – one, the move of the government announced in the budget last month, now a policy, reduces the dependence of cash-starved infrastructure segments on the banking sector and second, only viable projects will be able to raise money from the public.

The move will be a win-win situation for both investors and promoters of such projects, and attractive enough for retail investors. These retail investors can now reap dividends not only from the income of such REITs, which would not only in the form of rentals but also from appreciation of property prices.

At present, completed commercial properties have a long gestation period for occupancy, and the promoters too cannot liquidate the property as big buyers are scarce.

REITs can now take the entire property on lease and thus generate liquidity for the property. They can, in turn, sell units to a pool of investors akin to mutual funds, and be in a position to return incomes bench-marked to rates like inflation or fixed deposit rates, say bankers.

So far, such commercial properties could raise funds through rent-discounting where banks loaned sums based on annual rentals backed by mortgage of the property. The trusts will do away with dependence on black money or investors who route their unaccounted money to real estate, and attract foreign institutional investors. The other aspect is that commercial property prices will seek realistic levels to co-relate with rentals as a percentage of return to capital, in this case the cost of property.

Commercial properties like shopping malls, IT parks and offices unable to garner 100% occupancy will soon wither away or will need to rework rentals or find other sources for funding than public money through REITs.

REITs and InvITs need to be registered as a trust with the regulator first before investing in commercial properties directly or through special purpose vehicles.

REITs are like any stock traded in the exchange but the unique feature is that most of the profits generated from managing a group of properties are distributed to investors.

Retail investors can now look forward to investing in such projects through the mutual fund route, and according to fund mangers, a dividend of above 10% is more likely as the sector will now get the long -awaited boost of funds.

Most expect the assets under management under this segment to be about Rs 1.5 lakh crore, or 15% of the Rs 10 lakh crore assets under management of mutual funds in equities and debt.