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How to make REITs more viable for Indian market

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A fresh investment mechanism planned by SEBI – Real Estate Investment Trust (REIT) is expected to escalate the depth of the Indian real estate market and provide additional liquidity. This mechanism would enable people to channelise their investments in the realty market in a structured manner. This will also broaden the coverage of REIT regulations to cater to the funding necessities of not just real estate but the wider infrastructure sector in India.

Let us discuss here some of the amendments that are required in the existing format. The sponsor eligibility condition of five years’ experience in the real estate industry on an individual basis should be widened to enable non-core real estate players such as hotels, hospitals and other corporate houses to participate in REITs as well. The draft REIT regulations provide that a REIT cannot commence an initial public offer without the prescribed minimum asset value.

However, it may not be commercially viable for a sponsor to first transfer the assets and then approach the market for listing. Our lawmakers should amend this requirement and may study a requirement to have the initial portfolio identified and tied by way of definitive documents prior to the Initial Public Offer and the proceeds can be utilised to purchase assets.

Since, REITs would work parallel to a mutual fund model, we can borrow a few concepts from SEBI (Mutual Fund) Regulations, 1996, to make REITs more viable. The mutual fund regulations have a concept of co-sponsors that is noticeably missing in the draft REIT regulations.

Since REITs is a fresh product for the Indian market, there may be a preliminary reluctance by the investors to use REITs. Therefore, participation by anchor investors in REITs may be measured to inspire confidence among other investors to participate. Additionally, discounts on the price of units to different investor categories may be considered to make investment more eye-catching.

In conclusion, while the draft REIT regulations is definitely a step in the right direction for the real estate industry, it will not be a fruitful effort in organising real estate in India unless some of these key concerns are addressed.

Sushant Muttreja, MD, Cosmic Group

The views expressed in this article are the author’s own.


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