Topics Covered:
- Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Real Estate Investment Trust
What to study?
For Prelims and Mains: REITs- what are they, significance, potential and concerns associated?
Context: The recent initial public offering (IPO) of India’s first Real Estate Investment Trust (Embassy REIT) was subscribed 2.5 times, with the share sale generating a demand of over Rs 5,300 crore.
What are REITs?
REITs are similar to mutual funds. While mutual funds provide for an opportunity to invest in equity stocks, REITs allow one to invest in income-generating real estate assets.
They are collective investment vehicles that operate and manage property portfolios and give returns to investors. Securities and Exchange Board of India (Sebi) mandated that all REITS be listed on exchanges and make an initial public offer to raise money.
There are three types of REIT available: equity REITs which purchase, own and manage income-generating properties; mortgage REITs which lend money directly or indirectly to real estate owners; and hybrid REITs which are a combination of the first two.
How does an REIT work?
REITs raise funds from a large number of investors and directly invest that sum in income-generating real estate properties (which could be offices, residential apartments, shopping centres, hotels and warehouses). The trusts are listed in stock exchanges so that investors can buy units in the trust. REITs are structured as trusts. Thus, the assets of an REIT are held by an independent trustee on behalf of unit holders.
Why is it important?
- The Indian real estate sector has been facing a liquidity crunch on account of unsold inventory and low demand. REITs can help cash-strapped developers to monetise their existing property.
- In real estate sector, both rent and capital appreciation from property depend on the location, infrastructure and industrial development around that area. REITs juggle these risks through a diversified portfolio of properties.
- REITs can reduce the risk related to your property investments as 80 per cent of the value of the REIT should be in completed and rent-generating assets. They are required to be run by professional managements with specified years of experience notified by SEBI.
Sources: the hindu.
