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Got Rs 2 lakh to Spare? You could be a Landlord
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If you have Rs 2 lakh to invest, your bank may roll out the red carpet, your stock broker may inundate you with hot tips and the friendly neighbourhood jeweller may even offer a discount on making charges.
But you will probably get laughed out of the estate agent's office. Not anymore. With the Securities and Exchange Board of India (Sebi) issuing final guidelines for real estate investment trusts (REITs), an investor should soon be able to enter the property market with as little as . 2 lakh.` REITs are just like mutual funds. But instead of using the money collected from investors to buy stocks and bonds, they invest in property. Till now, investing in real estate has been a big ticket affair. Whether you buy a residential property or commercial space in a metro or tier I city, the minimum investment is upwards of ` . 30-40 lakh. Sebi has pegged the minimum investment in REITs at ` . 2 lakh, which will allow retail investors to participate in the real estate market.
In the secondary market, the minimum holding could be even lower at ` . 1 lakh. REITs allow even middle income individuals to invest in real estate. Without this, they can't participate in real estate because of the high entry barrier.
Investors in REITs will earn two different types of income. The rental income earned by the property in which the REIT has invested will be distributed as dividends. This will be tax free for investors, but the REIT will have to pay dividend distribution tax on these payouts. If the property held by the REIT appreciates in value, the net asset value (NAV) will go up and will lead to capital gains when the investor redeems his units. Since REITs will be listed on the exchanges and will be liable to securities transaction tax (STT), they will enjoy the same tax treatment as stocks and equity mutual funds. The short term capital gains (units held for less than one year) will be taxed at 15% while long-term capital gains (investment for more than one year) will be tax free. Industry watchers say the launch of REITs will increase the flow of funds to the cash-starved real estate industry.
Even if half of the currently available Grade A office space gets converted to REITs and listed in the next two-three years, it can mean an inflow of around ` .60,000-72,000 crore. But experts are doubtful if this will translate into better returns for investors in REITs. The idea behind Indian REITs is not to create something investors are looking for, but to resolve the financing problem faced by real estate developers and the banks that are funding them.
Right now, Sebi has allowed REITs to invest only in commercial real estate, where the rental yield (annual rent as percentage of property value) is 6-8%. Some experts pointed out that this is lower than the prevailing interest rate, which puts a question mark on whether REITs will make a good investment. However, most experts are optimistic.
The rental yield is not very attractive now, but is expected to rise in future, there is also the possibility of capital appreciation that will push up the NAV .
REITs will not only provide opportunity to earn regular rental income, but also capital appreciation on such assets, along with liquidity of listed market.
This is the time to get into commercial real estate, because it is at the bottom of the cycle.
What Sebi Guidelines Mean for Investors Minimum size of REIT `500 crore: Will prevent very small players from entering the REIT space IPO size `250 crore: Will ensure ample trading activity once the REIT units are listed. Market lot of `1 lakh: Will ensure liquidity and wider investor participation Minimum public holding of 25%: Will ensure sufficient liquidity of REIT units Maximum three sponsors: Will allow smaller players to join hands and launch REITs, but cap of three will avoid clutter Minimum sponsor holding: At 25% for first three years and 15% thereafter, this will ensure sponsors remain committed to the scheme Sponsor, trustee and manager ties: The three entities can't be associates, which will prevent conflict of interest Investments in commercial real estate with 80% in rent earning projects: Will provide safety and regular income but also muted returns Balance 20% in other assets: Under-construction projects, though risky, have potential to give higher returns At least 90% distributable cash flows to be distributed: Ensure regular income for investors
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