Scarcity of affordable housing in urban India and the existence of a wide gap between demand and supply of housing, both in terms of quantity and quality, have created a multitude of problems, including the proliferation of slums. As per the National Sample Survey Organization (NSSO), one-eighth of India’s urban population currently lives in slums. More than 300 million people are expected to be added to India’s working age population by 2050. An estimated 843 million people will live in Indian cities by then, which is about the same as the combined population of the US, Brazil, Russia, Japan and Germany.
The new government has announced that it is committed to providing “housing for all” by 2022. The draft Model State Affordable Housing Policy for Urban Areas issued by the Ministry of Housing and Urban Poverty Alleviation calls upon state governments to establish linkages and bring convergence with the various fiscal initiatives provided by the Govt. of India for Affordable Housing projects such as Foreign Direct Investment, External Commercial Borrowings, Urban Housing Fund Refinance Scheme, Real Estate Mutual Funds and REITS (Real Estate Investment Trusts).
The new investment instrument is expected to garner more interest after the Government announced in the Union Budget 2015-16 that it would rationalise capital gains tax on transfer of assets by REITs. Until REITs were introduced in India after being super successful in countries like US, Australia, Singapore, and Hong Kong, many institutions and individuals aware of real estate’s potential for handsome returns were still sceptical of investing in realty, given the perception of higher risks involved.
Through REITs, however, these risks are minimised and institutionalised, as the funds garnered can hereafter be invested in commercial complexes and offices, unlike in the case of individual investors, who mainly invest in residential properties. REITs being modelled like mutual funds, investors can now have their funds invested in commercial and other properties through a common pool, without themselves stepping into the market to directly purchase flats, offices, plots or other realty assets.
Typically, housing REITs acquire, renovate, lease and manage residential properties located in markets to generate rental income. As REITs cannot invest in under-construction property but only in those with regular income, they hold properties over the long term and generate virtually all revenue by leasing the properties. This revenue is used to pay for operating costs and distribute dividends among shareholders. For instance, a type of housing REIT known as apartment REITs own a portfolio of rental apartment properties, which may be large residential properties such as mid-rise and high-rise buildings, student housing, senior housing or social housing.
Barring the stock markets, although real estate offers the highest rates of annual return, it was not possible to invest small sums in this sector. Ownership of property was only possible by investing large sums, which is not always possible for small investors. REITs overcomes this barrier because the minimum amount required for investment is Rs. 2,00,000 only. Additionally, with ‘pass-through vehicle’ status being accorded to REITS, there are tax waivers for investing in it. Affordable housing that guarantees a stable and steady cash flow to REITs not only makes it a low risk business but would also help to attract the interest of institutional investors in the sector.
Since such stocks are listed on Stock Exchanges, these units can be freely traded like equity shares. REITs investments are primarily in completed projects that can generate revenues. With non-transparency and property valuations being a major hurdle in India, SEBI has ruled that an independent evaluator will assess the value of a property every six months. Moreover, there will be two authorised, empanelled evaluators. The net asset value of REIT units will need to be declared at least once every six months, thereby minimizing the chances of ad hoc evaluations.
REIT schemes are structured in a manner that facilitates investments in projects that can earn capital appreciation or ensure returns through rental income for REITs unit holders. In the latter scenario, 90% of the rental income has to be distributed amongst investors, thereby creating an alternative but safer asset avenue in real estate.
On the other hand, REITs provide the sponsor (usually a developer or a private equity fund) avenues of exit thus providing liquidity and enable them to invest in other projects. The potential of REITS for generating liquidity is being harnessed across the world to securitize rental-housing units owned by Govt. bodies. In fact, the Govt. can move beyond public housing for its employees to leverage REITs for creating a public-private partnership for the development, funding and management of affordable housing.
Considering these advantages, there is no doubt that REITs will ease the liquidity burden of many developers, while simultaneously ushering transparency and professionalism into the realty sector. It is expected to ensure the infusion of up to $20 billion into the sector over the next five years.
Author’s Note: Before setting up Lotus Greens, P Sahel worked for more than 16 years in some of India’s largest and most respected real estate companies like JLL and DLF. He is a member of CoreNet and is an industry thought leader and in the past has been associated with numerous industry bodies and real estate forums.