The government is working on a proposal to allow real estate investment trusts (REITs) to participate in the country’s rental housing market.
Housing and urban poverty alleviation minister Ajay Maken told ET that his ministry is framing a policy paper on REITs and it will be take up with the finance ministry soon.
“We feel a lot of foreign money can come through these REITs to invest in rental housing. It will also help in creation of space in the country,” the minister said.
Official estimates peg the shortage of homes in urban areas at over 18.78 million. To meet this requirement, the government would have to spend over 10 lakh crore, assuming an average expenditure of 6 lakh per home, Maken said.
REITs operate on the principle of mutual funds, which collect money from investors, deploy it into income producing real estate assets, manage the assets and pay the rent collected to shareholders as dividend.
Although market regulator Securities and Exchange Board of India had issued draft guidelines for REITs in 2008, the final norms are yet to be notified.
According to the minister, almost 11% of the total housing stock of 78.86 million homes is lying vacant because some homebuyers had invested only for speculative purposes.
“REITs can also buy these vacant homes across India and put them on rent. This will help us use more properties for tenancy purposes,” Maken said. Globally, REITs invest in both commercial and residential properties.
Apartment REITs, which invest in income-producing residential assets, are an established concept.
“Such REITs are attractive to global pension funds as they produce stable incomes even when the market is slow,” said Anckur Srivasttava.
Apartment REITs usually purchase all apartments in a building in order to have full control over it. This enables the trust to manage the property according to global standards. Experts say that while REITs could help bring in liquidity in the market and increase housing stock, for apartment REITs to be successful in the country, the government will have to incentivise investors.
“It has to make business sense for investors. Return on investment for apartments in India is very low at 2-4%, which is a disincentive for REITs,” said Anshuman Magazine.
While property prices in the country have risen considerably over the last few years, apartment rentals have lagged in growth. According to GenReal’s Srivasttava, another aspect that needs to be studied is how these REITs will exit residential properties, given the large black-money component involved in resale of real estate in the country.
Via : ET