SEBI proposes setting up of real estate investment trusts MUMBAI: India's markets regulator SEBI on Friday proposed setting up of real estate investment trusts (REITs), paving the way for wider participation by retail investors in the country's booming real estate sector. Under the draft guidelines issued by Securities and Exchange Board of India (SEBI) scheduled banks, public financial institutions, insurance companies and corporates will be eligible to set up a REIT, with initial networth of Rs 50 crore. REIT's are listed entities, similar to mutual funds, that use collective funds for owning and managing investments in real estate projects. The REITs will be managed by a separate real estate investment management company, SEBI said in the guidelines, which are awaiting public comments. They will be allowed to float schemes for a maximum 90 days, have to specify the amount to be raised and cannot offer guaranteed returns. They will also be required to distribute at least 90 percent of their annual income as dividends. REITs will be allowed to invest only up to 20 per cent of total asset value in incomplete and non-income generating assets, and can borrow only up to 20 per cent of the gross assets of the scheme. SEBI has also proposed safeguards by putting a limit of 15 per cent for investment in a single real estate project, and 25 per cent in real estate projects by a single group। All REITs will also need to secure a credit rating.Source: Economic Times Finally, the much awaited REIT guidelines are out and the media isn't sitting lazy to mark this as an event to celebrate. It is being tauted as a great investment vehicle for individual investor bullish on real estate. Here are a few observations about what may happen with the advent of REITs. A big chunk of the population with investable surplus not enough to buy real properties would jump in to encash this opportunity. Not only individuals with less capital, but also individuals capable of buying property would jump in the REIT bandwagon as this would be much much more liquid than a piece of land or a commercial building. This will leave the REITs with huge cash pile to be deployed in just one sector, real estate. This might take the valuations to moon if they are not yet there since there aren't many venues of investment. There is one very big difference in India and other developed markets and that is population. Per capita property available in India is much lower than that of developed markets. With rise in income levels, demand for housing and commercial property has increased at a rate way above the rate of increase in supply and this scenario is not going to change soon. Consequently, many of the lower income group were left devoid of housing and pushed to slum like conditions. This socioeconomic divide has been very harsh and is increasing. If supply does not go up many folds, REITs would definitely accentuate this socioeconomic gap and you know what happens when there is a section of those with high income and a much bigger section of those who are deprived of basic requirements such as housing. Higher social conflict, crimes. It is to be seen whether the market prices of real estate dictate REIT's NAV or it happens to be the other ways round, that is the properties getting valued according to the NAV of a fund holding similar kind of properties. The probability of this phenomenon will gain strength with substantial rise in REIT fund, the more money they have the more power they possess to move the prices. The very fact that REITs will be traded in the exchanges indicates that REIT's NAV would inevitably be volatile . Also, no one could deny that speculative money would be coming in making REITs speculative and more and more volatile. Now, if it happens that properties are priced in accordance with the NAV, we would see wide fluctuation in property prices unheard of in India. I wonder if this was a right time to come out with this product as prices are quite high and are, at many locations, trending downward. However, this downward trend would soon be reversed with the buying pressure coming from cash-rich REITs. And finally, a disclaimer: All of the above is mere imagination of mine and not based on any fact. Most probably, none of above is going to turn true. Thanks for reading all this bullshit.
Saturday, December 29, 2007
Labels: Real Estate
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