Ending a seven-year wait, the Securities and Exchange Board of India has cleared the way for the property-backed investment vehicles to be listed on local exchanges. The Indian Reit rules, which landlords like Blackstone have been waiting for, are fairly relaxed: Commercial properties worth at least Rs 500 crore ($82 million) can be pooled and sold to investors. The initial public offering has to be at least half that size. Separately, Sebi also gave a go-ahead to infrastructure investment trusts, which will allow investors to directly own a piece of a toll road or an undersea data cable. While inflation-adjusted returns on Indian bank deposits have improved since last summer's mini-currency crisis, they are still low. That means yield-starved Indian investor could warm up to Reits fairly quickly. The promise of a steady flow of dividends might make property a more attractive inflation hedge than gold, which earns no income.
Reits could also give small investors a relatively safe passage back into capital markets. Even with prospects of an economic revival improving under Prime Minister Narendra Modi's business-friendly government, inflows into equity mutual funds so far this year are still 28 per cent below the combined outflows of the last two years.
While demand for Reits is likely to be strong, supply could also be robust. Parcelling off their yield-earning assets will allow overly indebted developers and infrastructure companies to repair their balance sheets. That in turn could help free up capacity for a new construction boom which will give a boost to India's anaemic economy.
But Reits are not without their risks. A sudden inflow of cash could push up the price of existing property, while the pressure to boost yields could see rents rising indiscriminately. To mitigate that risk, India needs to cut the red tape that currently slows down new construction. A bigger concern for now is quality of issuance. The novelty value of Reits, and a couple of well-performing initial public offerings, could make the product an instant hit. If landlords try to take advantage by offloading low-quality real estate in stagnant cities, investors will quickly be pulling their toes out of the market again.
