27 May, 2019
Investors in India soon will be able to invest in a new mutual fund option called “Real Estate Investment Trust” or REIT. Embassy office parks filed a draft document with India’s Securities and Exchange Board for its issue of ₹ 5,000 crores. It will be available in DEMAT format and will be regulated by SEBI.
REIT in many ways is similar to a mutual fund. In REIT, investors with real estate as an underlying asset class pool funds for a particular time interval. Its structure and working are completely different from a mutual fund scheme.
The minimum amount that a user can invest in REIT has been kept to ₹2 lakh per investor. Once, they get listed on the stock exchange the REIT can be traded with a minimum amount of ₹1 lakh which will provide liquidity to real estate.
As per the rules set by SEBI, 80 percent of the value of the REIT assets will be in completed and revenue generating assets, while the 20 percent of the balance money will go in developmental properties, mortgage-backed securities, government securities, money market instruments, and other cash equivalents.
REIT has opened new doors of possibilities for both the investors and real estate developers to earn good profits. A real estate developer can earn by leasing its own commercial properties or earn a capital gain on selling some properties. All such income flows will occur either directly or through special purpose vehicles.
Meanwhile, the earnings gained by REIT will get distributed to unitholders. Under the Income Tax Law, income received by the investor shall be treated in the same nature and the same proportion as it had been accrued to the REIT’s. Thus, the income received by REIT’s in the form of a dividend, rent, and income will be distributed to the unit holder’s in the same format respectively.
SEBI rule also states that REIT should distribute more than 90% of the net distributable cash flow to its investors on a half-yearly basis. According to estimate, 7% to 9% will be yielded from a commercial property, while the capital appreciation can be expected between 4 to 7 percent in a long-term.
However, the earnings received by a REIT unitholder will be deemed as income and thus tax will be charged from them. Investing in real estate had always been a difficult task. It requires a considerable amount of funds and is illiquid in nature. With REIT these two drawbacks are eliminated and investing in real estate becomes simple.
REIT provide an easier way for the builder to gain funds and assist an investor in adding a new investment type in its portfolio.