Capital market regulator the Securities and Exchange Board of India (SEBI) has apprehensions over the feasibility of real estate investment trusts (REITs) in India. The regulator had issued draft guidelines for REITs a couple of years ago, but may drop its plan to introduce it now. According to reports SEBI feels having both real estate mutual funds and real estate investment trusts could confuse investors. It also feels that the REIT guidelines may not be suitable for a country like India, where the property market is lacking in depth and liquidity.
REITs operate on the principle of a mutual fund. Just like mutual funds collect money from investors and deploy it into equities and bonds, REITs deploy investors’ money into real estate assets. These trusts invest mainly in commercial property and pay the rent collected from properties to shareholders as dividend. REIT investment returns in Asia are about 6-12%, higher than the yields on government bonds. REITs in Japan, Hong Kong and Singapore offer dividend yields that are over 5% higher than 10-year government bonds.
Even in the case of real estate mutual funds (REMFs), the rules for which were notified in May 2008, the regulator has held back permission to some entities, according to industry circles. The Association of Mutual Funds in India (Amfi) set up the Satwalekar Committee to study the introduction of Real Estate Mutual Funds (REMFs), which submitted its report in October 2000. A sub-committee was further set up by Amfi whose recommendations were approved by SEBI in 2006. Due to residual issues like valuation, accounting, maturity of the scheme and investment restrictions, the REMF regulations, although approved earlier, were notified only on April 16, 2008.
As a product, REITs originated in the US and became popular in many countries across the globe. Many private equity investors in real estate projects in India were eagerly waiting for the REITs and REMFs to take off, so that they could get an exit option once their investments mature. The proposed REIT model in India has the same concept as the REMF model, that of sponsor, trustee company and the asset management company. However, the application for grant of certificate of registration for REITs has to be made by the real estate investment trust and real estate investment management company, separately. According to the person quoted above, REITs, in the Indian context, are more like REMF — very different from REITs prevalent in the West.