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the effective players
after opening up have been mainly opportunity funds and
large developer groups.
Retail individual investors
and households have been largely left out of the boom baring
a few high net worth individuals who may have invested in
properties. Also there is a view in certain quarters that
with such large funds investing, there has been instead an
upward spiral in the prices of real estate.
So how do the small investors and households with limited
resources participate in real estate opportunities?
The answer perhaps lies in real estate investment trusts (REITs)
or say real estate mutual funds (REMFs). REIT is a mutual
fund organised to invest in the real estate sector.
It is basically a company or a trust that buys, develops,
manages and sells real estate assets and allows participants
to invest in a diversified portfolio of real estate
properties. REITs are characterised primarily by the
following: their investment almost exclusively in real
estate assets; distribution of virtually all income to unit
holders; professional real estate management; and limited
liability for unit holders. REITs may or may not be listed
on the stock exchange, depending on the applicable
regulation in the host country.
There are significant benefits of investing in REITs. The
availability of professional management aside, real estate
'mutual fund' allows investors (specifically small and
midsize) to own a diversified portfolio of assets that might
otherwise prove prohibitively expensive. Further, under many
legislations, REITs enjoy a pass-through status with tax
incentives available to investors. Not only do most jurisdic
tions provide a mechanism to avoid double taxation, they
also defer taxability of income in the hands of the unit
holders to the point of distribution of income by the REITs.
Both aspects give REIT investors a significant advantage
over investing in a property company directly.
Besides lower transaction costs (as is prevalent in the
developed REITs markets) prevent leakage in returns at the
REITs entity level, thereby maximising returns to the
investors.
How does the real estate sector benefit from REITs? Most
real estate projects are leveraged. With the current squeeze
in liquidity introduced by the RBI, the cost of funds can be
quite high. Also, many opportunity funds expect very high
returns and may be averse to investing in otherwise
profitable projects. REITs provide an alternate source of
capital to the real estate industry other than traditional
banks and financial institutions. As a more stable and
transparent vehicle, REITs provide better access to deeper
and more liquid capital markets. Through investment in
equity of property companies, REITs also help in improving
the excessively skewed debt-equity ratios of property
companies.
Experience in other countries have shown that as REITs grow
and exert more influence on the real estate markets. By
focusing on the un derlying cash flow of assets, they impose
greater discipline on asset prices thereby reducing the
speculation in real estate. |
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