What were the intended objectives of the Real Estate Investment Trusts launched in 2014? Have they been able to achieve those objectives? Discuss reviewing their progress so far and various concerns around them.
Indian real estate sector a lot of challenges. One of the major issues is rising property prices despite large inventories and low demand. The real estate companies are struggling to monetize their projects leading to rise in debts and delay in completion of other projects. REITs were launched in 2014 to address the problems of real estate sector. The objectives were:
- To boost funding in the real estate sector by enabling people to invest in the sector.
- To provide a platform to allow all kinds of investors (even those with smaller budgets) to make safe investments in Indian property market.
- To provide diversified investment opportunities under a professional management, to ensure maximum return on investments
- Help real estate developers to raise funds by selling their rent-bearing assets to real estate trusts.
However ever after three years, no real action has been taken. Despite various amendments to the regulations related to tax, party transactions and asset valuation methods, developers have still not launched any REITs in India.
The REIT regulator, SEBI, in order to incentivize investments, allowed REITs to raise funds by issuing debt securities. Along with that REITs have also been allowed to lend to their Special Purpose Vehicles. Though the money raised could be used for short-term funding requirements of the project, however, the problem is that since it carries high risk, investors will demand high rates of interest from such debt securities. The profit margin for REIT will not be therefore high & in case the project gets stalled, servicing the debt would be a problem.
Along with that, the regulator needs to keep a watch on the fund utilization(raised through debt securities) in order to prevent the fund diversion. Also, Allowing REITs to hold a single asset, similar to, infrastructure investment trusts is not a good idea from the investor’s perspective. The investment diversification is a much better option and provides better opportunities than direct investment in real estate.
Though the success of these initiatives is bound to be limited as compared to foreign nations due to low rental yields in India. However, with proper regulations and implementation REIT can help in resolving the problem of financial crunch to some extent.
Topics: GS-III: Land Reforms in India