REITs, a game-changer

The demographic dynamics in India is changing fast, leading to a growing demand for real estate, which continues to be higher than supply. An estimated 843 million people will live in Indian cities by 2050, about the same as the combined population of the US, Brazil, Russia, Japan and Germany.

More than 300 million persons are expected to be added to India’s working age population by 2050. This will add to growing urbanisation and the need for housing facilities for this section, including the increasing number of women in the workforce. The introduction and implementation of Real Estate Investment Trusts can help bring the needed investments for meeting this increasing demand.

REITs can be a boon for the industry to tap into structured, institutional sources of funding. Various industry reports have pegged the investments required in the Indian real estate market by 2015 to be approximately $42 billion (excluding EWS housing) and approximately $257 billion (including EWS housing). Residential real estate alone will require an investment of $29 billion. The only way out is for the Indian economy to experiment with advanced funding options.

Public financing Not only can REITs create a level playing field for even common investors to share the gains of this asset class but it can also become a game changer in many other ways. By encouraging public ownership, it can provide the framework for real estate companies to become more transparent and better managed. Globally, REITs have demonstrated the ability to attract and effectively manage investments in the real estate sector. Besides other advantages, REITs bring increased transparency in the sector by adopting better corporate governance. By providing institutional exits to funds that invest in realty projects, REITs encourage developers to take to public financing as a new source of project funding. This way they also help the industry to become more transparent to conform with the stringent and continuous reporting requirements and disclosure norms required of publicly-owned firms.

For companies holding large chunks of real estate, implementation of a REITS regime will provide a new platform to divest their real estate. REIT funds can buy the real estate assets from business owners and also enable them to enter into an agreement to lease it back to them for a long period of time. It can therefore enable businesses to liquidate their real estate and free up capital for businesses. Property developers who have large portfolios of investment properties from which they can collect rental can use REITs to divest part of their portfolio, particularly commercial or industrial properties. In addition, they could also acquire land, develop it, attract tenants and once occupancy levels have reached a stable level they may divest it to the investment trust at a profit. That allows them to free up capital and then acquire more land for development.

The Indian real estate industry’s growing need for additional sources of funds and the success story of global REITs is compelling reason to encourage the implementation of a similar regime in India. Its implementation in the country would be a welcome step and would help open a new and invigorating chapter for the real estate industry.

(The author is Vice Chairman, Lotus Greens Developers.)