Tag: real estate

REIT All the Way

We had discussed REITs (Real Estate Investment Trusts) before. The SEBI board has approved the final set of regulations.

Key take away

  1. Tax pass-through: return from investments through these instruments will be taxed only in the hands of investors and the trusts will not have to pay tax on income.
  2. REITs and Invits should have a starting asset value of at least Rs 500 crore and the initial offer has to be Rs 250 crore or more.
  3. REITs will be allowed to invest only in commercial property. They should be completed and should be generating revenue.
  4. REITs will have to be listed. But if the experience of listing NCDs is any indication, expect little no secondary market liquidity.
  5. REITs will not be allowed to invest in other REITs.
  6. Minimum investment: Rs. 2 lakhs


This will be a good way to build a diversified portfolio. Right now, investing in any form of real estate is a nightmare. Ticket sizes tend to be more than Rs. 50 lakhs for decent properties, there’s a huge legal tail-risk associated with land, the total cost of ownership cannot be fully calculated beforehand, so ROI is a matter of gut-instinct. REITs will be a net positive for investors with white money.

Right now, small ticket purchases (less than Rs. 50 lakhs) has been focused on buying up land in the outskirt of cities or Tier-2/Tier-3 cities. If REITs end up being popular, then it may negatively impact appreciation rates in these areas.

Full text:

Indian REITs – Why You Should Care

The SEBI and the RBI are almost done with finalizing the regulation around REITs. Here’s a quick primer of what’s in store.

What are REITs?

REIT stands for Real Estate Investment Trusts. It is a company that mainly owns, and in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. The shares of REITs can be listed on a stock exchange and can be traded just like any other stock or ETF.

How are REITs structured in India


The size of the assets under the REIT shall not be less than Rs. 1000 crore which is expected to ensure that initially only large assets and established players enter the market.

Public participation

Minimum IPO size should be Rs. 250 crore and minimum public float should be 25%. Initially, till the market develops, the units of the REITs may be offered only to HNIs/institutions and therefore, the minimum subscription size shall be Rs. 2 lakhs and the unit size shall be Rs. 1 lakh.

Regulatory requirements

The REIT can only invest in assets based in India.

The manager needs to have at least 5 years of related experience coupled with other requirements such as minimum networth, manpower with sufficient relevant experience, etc.

The sponsor of the REIT will have to maintain a certain percentage holding in the REIT to ensure a “skin-in-the-game” at all times.

90% of the value of the REIT assets shall be in completed revenue generating properties.

90% of the net distributable income after tax of the REIT should be distributed to the investors.

The REIT cannot invest in vacant land or agricultural land or mortgages. But can hold mortgage backed securities.

The aggregate consolidated borrowings and deferred payments of the REIT have been capped at 50% of the value of the REIT assets.

The NAV should be declared at least twice a year.

You can read the full set of regulations on the SEBI website (pdf).

Who is likely to benefit?

Real estate developers might see a benefit in terms of reduced funding costs in the short-term. Mall-operators might choose to offload some of their properties into the new structure.

There might be a brief period of disruption as pricing information becomes public and developers lose their ability to exploit information asymmetry. The rent-vs-own argument gets new data points as well.

For the long-term, this gives investors the ability to gain liquid exposure to an otherwise illiquid asset class. Instead of trying to develop a multi-tenant apartment block yourself, you can just go buy a REIT for a lot less headache.

Watch for companies like Brigade and DLF to move their serviced apartments and malls into the new structure. And maybe push some unsold inventory as well. [stockquote]DLF[/stockquote] [stockquote]BRIGADE[/stockquote]

Time to put a roof on property prices

Despite the Indian economy plunging into a downward spiral with most sectors under stress and asset prices taking a knock, real estate prices have remained rock solid with hardly any signs of slowing down. Defying gravity, prices just keep going up. The Reserve Bank of India (RBI) in its Financial Stability Report for June, has also flagged rising house prices in most metros as a deep concern. This is despite its hawkish monetary policy stance. Also, bank credit to housing, has fallen, but developers are in no mood to relent and cut prices.

house price index

The share of credit to the housing sector fell to 9.5 per cent as at end March 2013 from 13.3 per cent at end April 2007. However, the latest report of Knight Frank India reveals that Mumbai continues to be the most expensive property market in India, with 29% of the city’s total under-construction units priced above Rs 1 crore, compared with 11% in the national capital region (NCR) and 5% in Bangalore.

India is among the few countries where property prices have actually risen after the recession of 2008 while major economies such as the US, UK and even China have seen an absolute reduction in property prices.


This explosive growth in housing prices despite the gloomy macro-economic scenario is fuelled by key factors like severe scarcity of low-cost housing and rising disposable income leading to high-income people cornering bulk of the housing supply in upcoming and central locations. Lack of affordable housing and the paucity of innovative financing schemes for housing have also led to profileration of urban slums.


In that case, are housing prices beyond fundamentals?

Despite falling sales, leveraged balance sheets and high interest rates, developers have been able to resist price cuts. Deepak Parekh, an industry veteran and someone who knows about housing better than many of our policymakers, believes that home prices are highly inflated in the country, including in smaller cities. He adds that increasing supply is the only way to bring home prices down.

Last year, Finance Minister P Chidambaram had also asked banks to pressurise builders to lower prices of apartments that are ready for possession but not getting sold. Developers are sitting on high inventories despite rising costs.
There is little justification for property prices to be among the world’s highest when infrastructure facilities are pathetic.

As per an estimation of the Task Force on Housing Requirements in Urban Areas during the Twelfth Five Year Plan Period (2012-17), the housing requirement in urban areas is 18.7 million units of which 18.5 million are for the Economically Weaker Section (EWS) and Lower Income Group (LIG) segment. As per a McKinsey Report, the demand for affordable housing will be 38 million by 2030.

Amidst such robust demand, there is a pressing need to put in place a fair and transparent market place. It is for this reason that the Real Estate (Regulation and Development) Bill 2013, approved by the Cabinet that allows for the creation of a regulator in the real estate sector had been keenly awaited.

Rise in Housing Prices

The Bill will ensure that construction is not only completed in a time-bound manner but that the buyer gets the property as per the specifications promised. Developers also need to clearly mention the approvals they have obtained and cannot sell homes unless the necessary approvals are in place. This would ensure greater transparency in project marketing and execution. However, the bill is silent on fixing prices. If price control measures are not introduced, the property market would continue to be at the mercy of speculators and cartels.

The steep housing prices clearly mirrors the country’s wealth imbalance. The centre should step in to address this imbalance by stifling price growth and encourage affordable housing.

While changing urban landscape has also contributed to higher housing prices, the main factor has been the high circulation of black money. The cash component involved in all transactions, up to 30% in some cases, is forcing the emerging middle class from buying a house.

When you have the drug regulator fixing prices of essential medicines to keep it within the reach of the common man and if stock markets can have circuit filters to regulate stock prices, why not have a price control in place for the realty sector that has linkages to more than 250 sub-sectors of the economy?


Real Estate Bill: Buyer Nirvana?

The Real Estate Bill 2011 is  the strongest attempt so far to regulate the massive real estate market. Since there seems to be rare consensus between political parties on the issue, there’s a good chance the Bill will be passed in Parliament. The Real Estate Bill will not only protect buyers from the unethical practices of unruly builders and developers but also promote transparency and accountability in the real estate sector.

Bangalore Properties - Real Estate India - Whi...

It is often the case that developers do not divulge the nature of a housing project, size and cost accurately. Agreements between buyer and developer typically favor the builder, giving him tremendous leeway to change terms without any compensation to the consumer. Take the case of Springfield Apartments in Bangalore where seven wings were constructed illegally and sold by the builder without the necessary approvals. Almost 1,300 residents faced eviction when the fact came to light.

Housing projects also get delayed or cancelled if builders launch projects without acquiring necessary sanctions. The Real Estate Bill aims to right this skewed balance of power and restore confidence of buyers in the real estate sector.

Key provisions of the Real Estate Bill 2011

The Real Estate (Regulation & Development) Bill 2011 supports regulated and planned real estate development via standardized practices and efficient systems for the sale of immovable properties. Key provisions of the draft Bill include:

  • Establishment of Real Estate Regulatory Authority (RERA) in each state to assure planned and orderly growth.
  • Mandatory registration of developers and builders for accreditation.
  • Mandatory public disclosure norms (allowed only after all approvals are in place) that include developer details, project, land status, statutory approvals, and contractual obligations.
  • Promoters’ obligation to adhere to approved plans and project specifications, with clause to refund buyer satisfactorily in case of default.
  • Allottee’s (Buyer) obligation to furnish payments at agreed interest rate without delay.
  • Directive for developers to allocate 70% of funds collected to that project to avoid misappropriation of consumer’s money and delays.
  • Establishment of Authority (one chairperson and at least two members with experience and knowledge of real estate) to advise government in planning and dispute resolution.
  • Establishment of a Real Estate Appellate Tribunal (REAT) by Central Government for quick resolution of disputes submitted by Authority.
  • Establishment of a Central Advisory Council to counsel government and make recommendations to protect consumers and foster growth of real estate sector.
  • Penal provisions to ensure compliance.
  • Jurisdiction of Civil Courts barred on matters before Authority or REAT.

What’s in it for buyers?

Bangalore Properties - Real Estate India - Sou...

The Real Estate Bill will help to contain the circulation of black money that is rampant in the real estate sector. Public disclosure norms and registration of developers will reduce fraud and possession delays as developers will have to complete all approval processes before launching a project or advertising it.

Developers’ unfair practice of reducing common areas, making arbitrary changes, selling off cordoned open spaces, and modifying terms would be restrained as these actions will be penalized. Fair agreement terms will also help buyers.

What’s in it for developers and promoters?

The Real Estate Bill will create an opportunity for honest developers to differentiate their projects and services from the masses. Since state authorities will be given 30 days to reject or accept an application along with necessary paper work, development of projects will not be delayed over administrative red tape. As allottees are also legally accountable under the Bill, developers will be protected from defaulting buyers and bankruptcy.

If the Real Estate Bill is passed in Parliament, buyers will be the happiest lot. Too many unscrupulous builders have come up, looting people as well as the environment with corruptly gotten sanctions, false promises and unplanned development. However, a Bill is as effective as its implementation. Will the Real Estate Bill lead to the maturation of a quality real estate industry in India? I sure hope so.


Realtors fail to repay bank loans

Realtors bank loans
Bank Loans

Around Rs20,000 crore of repayments were due by real estate companies by 31 March after loans were restructured by banks following the 2008-09 slump, but at least half a dozen of them have been unable to meet this deadline.“They are likely to default,” the chairman of a large public sector bank said, adding that some of these firms already have overdue interest repayments.

via Realtors fail to repay bank loans – Home – livemint.com.