Real Estate Investment Trusts

India is considered to have a good institutional framework, a good capital market structure and an active investing public, yet one of the financial products that Indian investors have been deprived of is Real Estate Investment Trusts (REITs). Looking in hindsight at the real estate boom the country witnessed, if REITs had been in place a lot of small investors would have made money.

REITs give investors returns which are comparable to small cap stocks. An added advantage is that they are required by law in most of the countries where they operate to distribute 90 percent of their profits in the form of dividends. This will generate a good cash flow for the investor. This financial instrument however has been denied to the Indian investor on the pretext that, REITs are not suitable for the small investors and that the real estate markets are plagued by malpractices and black money.

So what exactly are REITs? A real estate investment trust is a real estate company that offers common shares to the public. In this way a REIT stock is similar to stocks of companies issued to the public. REITs typically operate and make money by buying, renting and selling commercial and residential spaces. To obtain an REIT status companies are required to distribute 90% of their taxable income to the investors and the investors in turn are taxed on their capital gains.

The disposable income in the hands of the Indian public has increased and many people buy houses solely for investing their money. Buying a house is not easy and the legwork required to be done is taxing for the working professional. To find the right flat in the right location, the piles of legal documents to wade through, tying up the loan and finally getting the registration process through is too much of work and maybe worth it when buying the dream house of yours. But if you want to buy for the sake of investment, then it’s certainly not worth the time.

This is where REITs chip in - an easy, hassle free way to invest in property. A REIT employs a horde of real estate professionals and legal eagles, who will make sure that every piece of property acquired has a clear title and is not embroiled in a legal morass. These experts will be on hand to fight any legal battles arising out of the property which individuals cannot.

Ascendas Pte is a Singapore-based property company, is using the city-state’s stock exchange to sell units in a business trust, which owns four large information- technology parks in India, including one in Bangalore. It is an irony that while investors in Singapore safely invest in India, sons of the soil find it to be a risky bet. That real estate investing is risky in the Indian markets must be a reason for REITs to be allowed by the regulators as it would be a boon for the aam admi who doesn’t have the legal, financial moat.