Retail investors set to reap gains from growth of realty sector

Many of you have been reaping the benefits of the boom in the stock market, either directly or through the mutual fund route.

In the near future, you will be further empowered to invest in a similar manner in the growth of the real estate sector through the Real Estate Investment Trusts (REIT), without having to actually own a property.

The various aspects of REIT have been going through layers of fine tuning and during fag end of the last calendar, the Securities and Exchange Board of India (SEBI) introduced draft regulations to make it more attractive to a retail investor.

The regulations provide that the REIT should be in the form of a trust registered under the Indian Trusts Act, 1882 as compared to the global scenario where REITs can be in the form of a trust or a company.

The REIT as well as the management company shall be registered with the SEBI and should have minimum net wroth of Rs 5 crore. The REIT should be managed professionally with adequate infrastructure and in compliance with the governance rules specified in the Draft Regulations.

The management of the REIT and the management company shall be independent and that the transactions with the associated or related concerns shall be at arm's length.

REITs are permitted to invest only in real estate which shall generally be income-generating. The Draft Regulations further provides that the schemes offered by REIT should be close-ended only that should be listed on the Indian stock exchange and shall be terminated on maturity or on completion of purpose.

"The draft regulation is indeed a silver lining for the retail investors to become the part of the growth story. At the same time, REIT regime will also provide an additional avenue to the Indian real estate developers to fund their projects," said an industry player.

To top this up, some of the recent measures taken by the Government such as repealing of Urban Land Ceiling and Regulation Act (ULCRA) would definitely provide impetus to the real estate sector.

At the same time the REIT regime would enable the retail investors to share the upside of the sector without going through the hassle of owning or managing the real estate properties.

However, according to industry practitioners and analysts, in order to make the REIT regime successful, the FDI Policy and the exchange control regulations would need to be amended appropriately.

This will not only facilitate exit for the Indian retail investors at large but will also allow foreign funds including pension funds to participate in REIT schemes.

In addition to this, the growth of REIT regime and of real estate sector would depend on most efficient tax structure both for REIT and the investors.

"The simple and attractive alternative could be to give similar tax treatment as is enjoyed by mutual funds and its investors. Interestingly, Satwalekar Committee's report also noted that the real estate scheme being a part of mutual fund should be eligible for all tax benefits applicable to mutual funds in general as this would enhance the attractiveness of the schemes to investors. This approach would achieve single taxation as is being achieved in case of mutual funds," said M Laksminarayan, partner, Deloitte Haskins & Sells.

The Draft Regulations provides for certain investment restrictions on REITs like prohibition on purchase of vacant land, purchase of not more than 15 per cent stake in single real estate project and not more than 25 per cent of a single developer's portfolio.

"In order to make the regime more effective, some of these restrictions should be relaxed going forward as schemes floated by REITs stabilises and establishes a track record," he added.

Presently, the close ended scheme need to be terminated on maturity. "Given the complexities of the nature of the industry and the nature of projects, roll-over of the scheme may be considered from investor's stand point," urged Laksminarayan.

INDUSTRY WANTS

FDI Policy and the exchange control regulations need to be amended appropriately to facilitate exit for the Indian retail investor

This will also allow foreign funds including pension funds to participate in REIT schemes

Similar tax treatment as is enjoyed by mutual funds and its investors

Roll-over of the scheme may be considered instead of close-ended scheme

DRAFT REGULATIONS SAY

REIT should be in the form of a trust

REIT as well as the management company to be registered with SEBI

Minimum net worth of Rs 5 crore

Schemes offered by REIT should be close-ended

Should be listed on the Indian stock exchange

Should be terminated on maturity or on completion of purpose

Prohibition on purchase of vacant land

Purchase of not more than 15% stake in single real estate project and not more than 25% of a single developer's portfolio