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Investing in Real Estate in India is not considered a middle class person’s cup of tea. Not having avenues to invest in this blossoming sector is leaves the country at more disadvantage than individuals. Real estate investments have been cumbersome, engaging paper works and high amount of capital and they are also vulnerable to frauds in a country like India. Real Estate Investment Trusts (REITs), however, have paved the way for safe, hassle free and affordable investments in Real Estate Sector.
Individuals can invest a minimum amount of 2 lakhs in REITs, which is administered by professionals. They in turn, will invest 90% of the assets in completed, rent generating properties, ensuring stable dividends to the investors. This way, investors can land their investments in real estate by purchasing the listed securities issued by REITs. The remaining 10% of the investment is allowed by SEBI to be invested in developmental properties, mortgage backed securities, shares of a company deriving 75% of the revenue from real estate, government securities, money market, etc.
To ensure safe and transparent transactions, SEBI has laid down certain requirements for REITs:
REIT must be set up under Indian Trust Act 1882 and registered under SEBI regulations. Registration is not mandatory in countries like U.S and Singapore; however, it must be done in India for smooth working. Multiple classes of units of REIT are not allowed.
At least 90% of the cash flow and 90% of the sales proceeds from the sale of assets to unit holders must be distributed to investors on a half yearly basis.
Non Resident Indians (NRIs) and Foreign Portfolio Investors (FPIs) are allowed to invest in REITs without any approval.
Full-fledged valuation of all REIT assets is required to be done on yearly basis, through a registered valuer. Net Asset Value must be declared within 15 days from such valuation.
To raise funds for the first time after valuation, an REIT must issue Initial Public Offer (IPO) of a minimum value of 250 crore.Later, funds can be raised through follow on offers, rights issue and qualified institutional placements.
An REIT must invest at least 80% of the value of assets in completed, rent generating properties. It is required to invest in at least two projects, investment in any one not exceeding 60% of the asset value. Investment must be made only in assets situated in India.
At least Rs 1,000 crore assets must be under REIT. These assets could be across single or multiple projects.
Benefits to Investors:
It’s no mystery that REITs are safe hands for your investments which not only place your assets in one of the most lucrative market but also fosters economic growth by diverting more funds in market. Let’s look at some more reasons to consider REITs for investment.
This is the most attractive feature for Indians. Nothing seems to be a big deal if it is giving high yields in the end. Moreover, the payment of dividends and is secured by stable rents from long term leases.
A complex, head tousling tax treatment is not required. Investors or shareholders are just required to allocate dividends to ordinary income, capital gains or return on capital. Dividends are to be allocated to capital gains only if the REIT sells the assets. Moreover there is no capital gains tax in this case, which is as high as 20% in case of physical real estate.
Investing in physical properties charge you 5-6 per cent stamp duty, which is negligible if you invest in securities which are properties in disguise.
The online brokerage account charges you just 0.1% of the brokerage to buy REIT securities against 4% brokerage charged by Real Estate Agents.
You obviously don’t require months to sell your REIT stocks online, which you would require to sell a physical property!
Smart people diversify their portfolio to increase their returns and reduce their risk instead of dumping all their money at one place.
In our opinion, SEBI has come up with an amazing investment avenue, opening doors to the people who wished to invest in real estate but were not backed up with enough funds. Now, they finally can make their contribution to real estate sector and enjoy the benefits thereof.