by Akhilesh K Prasad
The real estate sector had hit a period of a slump lately. To boost it, the central government hurried the process of reforms. The Real Estate (Regulation and Development) Act and the Benami Transactions Prohibition Act were enacted to organize the previously informal real estate sector and curb the flow of black money respectively. The move has also brought about transparency promoted the adoption of global best practices. In keeping with this broader perspective, the Securities and Exchange Board of India (SEBI) has amended the SEBI (Real Estate Investment Trusts) Regulations 2016 (REIT Regulations) and the SEBI (Infrastructure Investment Trusts) Regulations 2014 (InvIT Regulations).
The changes brought about by the SEBI are expected to lower the costs associated with raising capital. This came as a blessing for the real estate sector which had been struggling with the inflationary tendencies in the cost of financing. The amendments have allowed REITs and InvITs to issue debt securities, thereby increasing their borrowing options. The minimum holding norms for REITs have also been relaxed. Lending to holding companies or special purpose vehicles (SPVs) have also been allowed. Earlier, they were allowed for InvITs only.
The amendments introduced by the SEBI and expected to boost the popularity of the trust structure in India, akin to the USA and UK. So far, investment in the real estate sector has been restricted and regulated. Since the SEBI notifications on the norms for fundraising in 2014, issuance by REITs and InvITs have been staggered.
Now that REITs and InvITs can issue debt securities, lend to SPVs and holding companies and expand the investor base, such trust structures are expected to become preferred avenues for investment. The listing of REITs and InvITs on stock exchanges has been negligible before the aforesaid amendments. Such listings are expected to pick up thereby enhancing liquidity and allowing potential investors to invest in real estate and publicly traded securities.
As a result of the amendments, the commercial sector will have better capital appreciation as compared to the residential sector. It could unlock the value of commercial assets for developers and they can look at REITs as a vehicle to exit at an attractive commercialization rate. Thereby, reducing their high-level debts. High-value properties which used to be reserved for large institutional investors will now be available to retail investors. Institutional investors will be allowed liquidity and greater geographical sector diversification through REITs. Investors will be able to take positions in investment properties at transaction costs. This will be lower than direct investment. REITs will increase the transparency of the sector as it is obliged to provide shareholders with detailed information on the values of income and capital. It will enhance asset management capabilities and reinforce organised structures in the real estate industry. Developed and professional REIT sector will contribute to broadening and deepening the base of real estate investors by attracting institutional and retail investors.
Thus, there will be long-term benefits to the real estate segment that will, in turn, stimulate economic development.
An MBA by qualification, Akhilesh has dabbled into various businesses. He is a keen debater, data miner and analytically inclined. His blogs tend to present a fresh perspective on any given matter