REITs Coming: Is it the right product for you?

SEBI draft paper on Real Estate Investment Trusts (REIT) permits real estate funds which will invest in completed and revenue generating real estate. While you can invest without physically buying a property, your investment carries risks of price corrections and hence fraught with timing of entry and exit errors

On 10 October 2013, the Securities and Exchange Board of India (SEBI) issued a draft Real Estate Investment Trusts (REITs) Regulations, 2013. A REIT is a pooled investment entity registered with SEBI, just like a mutual fund. REITs invest primarily in real estate of completed and revenue-generating properties. The rental received from these properties will be distributed among investors as dividend. Real estate is a big ticket investment with a huge chuck of money getting locked in buying a property. The advantage of REIT is availability of exposure to real estate with a smaller ticket size as well as diversification of investment by REIT.
 

As in mutual funds, REITs too will have managers who will manage the realty portfolio and try to earn higher returns. The minimum asset size that a REIT will be required to have is Rs1,000 crore. It will surely achieve diversification across locations and types of real estate like offices, warehouses, shopping malls. An individual investor cannot achieve such diversification in a capital intensive real estate investment. While the REIT managers should be doing due diligence before investing in any property, real estate in India is marred with disputes and title issues and corruption. The regulatory framework around the real estate sectors needs to be vastly improved to give fair chance for REIT to succeed. In June 2013 Union Cabinet approved the Real Estate Regulatory Bill. If implemented correctly, it will help the real estate sector.
 

While Sebi rules will help investors avoid the developmental risk of investing in under-construction projects, real estate in India has its up and down phases with the cycles being longer and more volatile than in the case of equities. Investing in REIT at high price levels and exiting at wrong time of downturn will inflict heavy losses. In difficult times, you may have to sell your units at a steep discount just like you get a beating when selling property at a wrong time. That REITs would be listed on stock exchanges is not of much comfort because real estate in India is an illiquid asset. Moreover, the Sebi draft gives leeway to have the Net Asset Value declared only for a minimum of two times in a year. A six monthly updation in the valuation capturing key changes in the last six months has been specified.

 

SEBI has given the minimum subscription size to be Rs2 lakh and the unit size shall be Rs1 lakh. Thus, REIT will be restricted to HNI (high network individuals), which seems appropriate. SEBI has invited comments on the Consultative Paper latest by 31 October 2013. The final regulations may incorporate the received feedback.

 

In the next article on REITs we will explain how REITs work in the US and how different they are from the Indian version as envisaged by Sebi.

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COMMENTS

AP Singh

5 years ago

Where can read i this Draft?

REPLY

raj

In Reply to AP Singh 5 years ago

http://www.sebi.gov.in/sebiweb/home/deta...

AP Singh

5 years ago

Where can i find this Draft for read, is it available for public view.

Hike in import duty will make gold costlier, says WGC

World Gold Council said hike in import duty on gold will not be effective in the long run as this is likely to lead to demand being met through unauthorised channels

World Gold Council (WGC) today said hike in import duty on gold will make the precious metal expensive, while cautioning that curbing supply will not be effective in the long run as this is likely to lead to demand being met through unauthorised channels.

 

“The hike in customs duty on gold from 6% to 8%... is yet another step to limit supply of gold by making it more expensive. Almost all of India’s gold demand is met through imports and this hike will increase the cost of gold for retail customers," WGC India managing director Somasundaram PR said in a statement.

 

He acknowledged that large current account deficit is unsustainable and needs to be checked, but said that there were number of factors which influence the current account deficit in India and gold is one of them.

 

“The nature of demand at the retail level is such that restricting supply will not be effective in the long run and is likely to lead to non-transparent price premiums in the market and demand being met increasingly through unauthorised channels which will not be positive for either the economy or for society,” Somasundaram said.

 

WGC India chief said that demand for gold, whether in the form of jewellery or investment (bars and coins), is driven by millions of individuals investing as part of their household savings and is not discretionary spending for consumption.

 

“People buy gold as a long-term investment to protect their wealth and gold also has huge significance socially, emotionally and economically in India,” he observed.

 

Highlighting that India is a significant stakeholder in the gold market with over 20,000 tonnes in the hands of millions of people, Somasundaram advised that policy direction should view gold as a strategic investment asset for India.

 

“...the long-term policy objective must be to monetise the nation's gold stock to support economic growth,” he added.

 

Late last night, the government increased the customs duty on gold from 6% to 8%. This is the second hike in the duty in six months as gold imports touched an alarming 162 tonnes in May.

 

According to WGC data, India imported 860 tonnes of gold in 2012 calendar year. During January-March of 2013, the country imported 215 tonnes.

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Commodity benefits to remain limited for India Inc

According to India Ratings & Research, due to the current price levels of most commodities, a significant, sustained price correction is unlikely and thus the impact of recent price correction will be limited

India Ratings & Research (Ind-Ra) said it believes that the recent commodity price correction will have a limited impact on BSE 500 corporates. Additionally, given the current price levels of most commodities, a significant, a sustained price correction is unlikely.

 

According to the ratings agency, crude and its derivatives, metals, coal and agri-commodities can affect Indian corporates.

 

Crude and its derivatives

Ind-Ra said, the combined effect of a crude price rise (in US dollar terms) and rupee depreciation shaved off 4 percentage points on an average from the EBITDA margin of the corporates which use crude derivatives. These sectors are paints, plastics and lubricants. With the average crude price declining to $103 per bbl in FY13 from $107 per barrel (bbl) in FY12, these sectors have enjoyed some benefit to their margins. However, FY14 margins are unlikely to improve over the margins in Q4FY13.

 

Metals

On an annualised basis, the prices of crude and metals such as aluminium, nickel and steel are not likely to decline significantly from the current levels. Indian corporates who are the buyers of such metals would receive much limited benefit from the price correction. Owing to depreciating Indian rupee and physical premium, metal buyers generally receive at best half of the price correction benefits. The capital goods sector would be the highest beneficiary of these corrections. Other metal users such as auto, auto ancillary are likely to have limited benefit.

 

The current price of aluminium and nickel is at or below the respective 90th percentile marginal cost of production. However, potential for further price corrections remains for some base metals such as lead/zinc, copper, prices of which are currently 8%-12% above the marginal cost of production, Ind-Ra said.

 

Coal

According to the ratings agency, if the Indian rupee remains stable and coal prices fall further by another $10, which is likely, the earnings before interest, taxes, depreciation and amortization (EBITDA) of power generators may expand by 14% to 16%. For cement producers, a similar fall in coal prices may translate into a saving of around Rs2 per bag.

 

Agri-Commodities

Key agriculture-based commodities considered by Ind-Ra are foodgrain for FMCG companies, sugar and edible oil for the food processing industry, rubber for tyre manufacturers and wood pulp for paper and newsprint industries. Most agri-commodities with the exception of grains and edible oils showed a price correction during March-September 2011. However, the secondary users of these commodities could not accrue the benefits of falling raw material prices in FY12 in the face of muted demand which has increased competitive intensity.

 

According to the ratings agency key beneficiaries of agri-commodities price correction are likely to be tea and coffee processors and tyre manufactures. FMCG companies in the food sectors may receive limited benefit driven by challenging volume growth and enhanced competitive pressure.

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