REIT’s may solve India’s real estate problem: Knight Frank Research

Track2Realty: India faces shortage of fresh supply of houses, the Technical Group on the Estimation of Housing Shortage projects the total shortage of dwelling units in urban areas in 2012 to be 18.78 million, said a report by Knight Frank Research.

The estimated slum population in India is 94.98 million in 2012. As against this, the number of dwelling units sanctioned under JNNURM in seven year Mission period was 1.6 million.

The report further said that by 2031, about 600 million Indians will reside in urban areas, an increase of over 200 million in just 20 years. This change in the socio-economic landscape will have a bearing on several things, housing being the foremost.

The industry facing continued pressure in terms of raising funds for investment, the research report suggests that India must have a Real Estate Investment Trust (REIT). A REIT is a company that directly owns income producing real estate assets and provides a trading mechanism to the investors.

“On one hand an institutional market of REITs can ensure steady supply of capital to real estate development which shall aid in increasing the supply of houses and on the other it shall serve as an investment vehicle for individuals,” said the report.

The depth of the REIT investment vehicle in developed markets can be assessed from the amount of capital raised over the years. For instance, in the US market, REITs have raised $66.8 billion in 2012 (until November) alone and the momentum of fund raising through this investment vehicle has steadily increased since the global financial crisis of 2008, said the report.

India on the other hand has been slow to look into such a mechanism. Securities & Exchange Board of India (SEBI) had issued draft REIT Regulations in 2008. However, things have not moved since that time.

“Reason being that the confusion with another set of guidelines for Real Estate Mutual Funds (REMF) in 2008, which has also not translated in to product offerings yet. This confusion arises from the fact that both would regulate a similar product. Also lack of transparency and uncertainty involved in the conduct of real estate business has delayed the establishment of the REIT investment structure,” pointed the report.

The World Bank report ranks India at 182 out of 185 countries in the ‘dealing with construction permits’ category.

In the absence of REIT guidelines in the country, some real estate developers have already listed their REIT’s overseas. These investment vehicles invest in FDI compliant properties in India and hold both commercial and residential properties mainly at the development stage.

The properties within these schemes are located in top urban centers like Delhi-NCR, Mumbai, Bangalore, Chennai, Kolkata, Hyderabad and Pune. However, these vehicles were floated before the global financial crisis and the investors are yet to see meaningful returns from these.

The reports also suggest that in light of the dwindling interest among investors to invest in Indian real estate, such a mechanism is important.

Institutional finance to the sector has witnessed a slowdown. Bank credit to the sector has slowed down on account of increased risk perception. In the last two years, the growth in banks’ credit exposure to the real estate industry has come down from 19.08 per cent in November 2010 to 5.29 per cent in November 2012.

Similarly, foreign investment in the sector has also witnessed a downtrend , the share of real estate has declined  from 9 per cent in FY12 to 5 per cent in FY13 (until Oct) in the total inflows in the country.

The last two years have contributed less than 1 per cent to the total IPO money raised by the industry in the last seven years highlighting the uncertainty of this source of funds.