Opportunity of real estate investment in India is huge. Going by figures, India is among the top five most attractive real estate investment destinations of the world. China is topping this list with US & UK ranked second and third respectively. It may be surprising to see US ranked so high even after the global turmoil they caused in 2008-09. Fourth place is enjoyed by Singapore.
I was surprised to see India placed only at number 5. My expectation was that India will rank fourth or higher. Infrastructure in India is improving day by day. With India becoming economically more dominant, real estate sector must improve to match the requirements. Real estate investment in India has always been rated miserably because of bad policies of the government.
Perhaps real estate is one of the most disorganized and badly managed sector in India. Real estate investment in India is still in its very nascent stage. Except for metropolitan cities, the culture of real estate investment has still not picked-up. But there is an increasing tendency of Indian middle class getting involved in real estate investment.
With standard of living of middle class improving, and good builders also entering the market, real estate investment in India is set to see new highs. It will be interesting to see how real estate investment in India has behaved post crisis of 2008-09. I have provided a snapshot of S&P BSE Realty Index’s performance between 2007 and 2013.
It is quite evident that post 2008-09 crisis, Indian realty Index has never evolved. This is mainly due to bad policies of Indian government that never helped real estate investment in India. But with news of REIT now being introduced in India, we can hope to see up-trend very soon.
List of Stocks in S&P BSE Realty Index
|SL||Company Name||Last Price||Market Cap (Rs Cr.)||Weight in S&P BSE Realty Index|
In the past, Indian builders have expressed distress about regulatory policies for real estate sector. In developed countries there is a system for approval of investment projects. But in India a centralized approval system is not in place. This makes approval process very confusing and time consuming. Time bound approval system will do a world of good in India. China on the other hand has a great investment management system when it comes to real estate. China markets same sets of advantages what India does to attract real estate investment. On top of this, China’s project approval decisions are done in matter of days. This is the reason it has been ranked at number one in the list of preferred real estate investment destinations. India needs to reform its clearance system for sure.
India strong real estate potential can be tapped by introduction of REIT (real estate investment trusts). At present REIT does not exist in India. All over the world real estate investment trusts finance majority real estate projects. Even Indian developers has accepted that REIT’s will prove good in India. Seeing the growth potential of India, it is perhaps the best time when REIT is established. Indian Government shall come forward and show their intention to back REIT type funding systems of real estate projects. In nut shell India shall make its investment policies more investor friendly.
There is a news recently heard (oct’2013) that SEBI has allowed formation of REIT (Real Estate Investment Trust) in India. REIT will manage and ensure overall growth of real estate investment in India. REIT’s will not only help investors but will also help developers in financing of their projects. The framework based on which REIT can be introduced in India was under discussion since last 5 years. Before REIT is introduced in India, it was important to formalize how REIT will regulate the real estate sector in India.
Real Estate Investment Trusts in India(REIT’s)
REIT is like mutual funds. We buy units of REIT at some price, and they (REIT) in turn invests our money in real estate sector. REIT will invest in real estate sector by buying directly a property or by issuing loans on mortgage to developers. Traditionally, REIT have provided above average returns to its investors. Real Estate sector is inherently a disorganized sector. If left alone it will develop fast like a jungle. But REIT’s objective is to build and manage a organized real estate sector. REIT’s main source of income is rental income. The profit made by REIT is distributed among its unit holders. A guideline has been set that 90% of the profits generated by REIT will be distributed among its investors (after tax adjustment).
Should we Invest Directly in Properties or REIT?
There are two clear advantages of investing in real estate sector through REIT, (1) no direct interaction with builders and (2) immediate income generation. Both of these factors makes REIT just the right investment option for common man. But initially common man will not have access to REIT. Only financial institutions and rich people will get the exposure to REIT initially.
Future Prospect of Real Estate Investment in India
In order to understand future prospects of real estate investment in India, we need to look at one important figures. If we set global investment in real estate sector as 100%, percentage share of India is only 1.3%. Considering India is among fastest growing economies of the world, infrastructure development is essential. Development of real estate is a must if growth targets needs to be achieved. In next 20 years, percentage share of India in global real estate investment shall touch 6% levels. This forecast gives a hint to us that how much global fund will flow in India. Establishment of REIT has been done to channelize this possible inflow of fund for real estate development in India. I will personally would like to have a chance to start investing in REIT at this point of time. Because the growth that we will see in times to come (because of REIT) in real estate sector in next 20 odd years is tremendous.
How REIT will operate in India?
Initially REIT units will be distributed to only financial institutions and elite investors. Idea will be to keep REIT as close-ended scheme. Initially, REIT units will not be traded as common stocks. Instead it will be issued as IPO, a specified fund will be generated, and then this fund will be used for real estate investment in India.
REIT will be asked to invest only in completed real estate projects. The idea is to start generating income from day one. Approximately 90% of generated funds will be used to invest in completed-projects. For balance 10% funds REIT managers will be free to invest in any type of security/asset.
In order to start operating like REIT it will be mandatory to seek approval of SEBI. Once SEBI registers a investment trust as REIT, it can then issue units to investors. Any investor (domestic or foreign) investors will be allowed to buy REIT units. But minimum unit size will be Rs 1 lakh. Minimum initial investment will be limited to Rs 2 lakhs and above. It is assumed that those wealth individuals who were traditionally investing in gold will now like to invest in REIT.
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