NRI Real Estate and Property Investment in India
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Stable GOVT and REITs can Bring Back NRI Investors
Friday, June 12, 2009

With the market sentiment buoyant over the prospects of a stable and investment-friendly government at the Centre and a distinct exchange rate advantage, overseas Indians may once again turn their attention to the rapidly-recovering real estate market in India. More so, as market regulator Sebi (Securities and Exchange Board of India) has begun deliberations with experts to set up a framework for Real Estate Investment Trusts (REITs). In April last year, Sebi had prepared norms for real estate mutual fund. But the launch of real estate MF was delayed due to the market meltdown. The realty sector, battered by the financial crisis, is looking at the real estate investment trust (REIT) market to lift the spectre of gloom.

Over the past 3-4 months, the global REIT market has witnessed a sharp pullback, recording an equity infusion of $8.7 bn. Equity infusion by investors at this point in cycle suggests that they see value and opportunity at current price levels. According to a recent research by brokerage Motilal Oswal, the improvement in the global REIT market will positively impact commercial real estate in India, which lacks any monetisation vehicle at present. If the recovery in REIT demand continues, it might prompt leading commercial real estate players such as DLF, Unitech and IBREL to re-draw their REIT plans. A real estate investment trust or REIT is a vehicle for a company that invests in real estate, which helps in reducing or eliminating corporate income-tax. An REIT is a trust that uses the pooled capital of many investors to purchase and manage real estate assets and/or mortgage loans.

It is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. It receives special tax considerations and generally offers investors high yields. Like other corporations, REITs can be publicly or privately held. Experts say REIT provides a similar structure for investment in real estate as mutual funds do for investment in stocks. Real Estate Mutual Funds (REMFs) are the Indian avatar of the international REITs platform, adapted to the existing Indian mutual funds platform. The asset management company (AMC) invests in a range of real estate assets around the country and creates a fund based on those assets. Investors can buy shares in those funds, which are traded on a daily basis on stock exchanges. The value of the shares depends on the value of the underlying real estate assets.

If the sector needs quick money, these funds are liquid assets, which can be sold conveniently. The flexibility of investment will offer a great sense of confidence as they can liquidate their investment faster than the physical assets. As for their potential in the current context - while everybody is now working on entry and creating assets, the important question of who will buy these assets to provide an exit to the developers / investors needs to be addressed. The leveraging allowed in case of Indian REITs is the lowest (at 20 per cent of the value) compared to 35 per cent in case of Malaysia, Hong Kong, Singapore, and Taiwan and 200 per cent in case of Korea. This could result in a lower yield - and because it is not really leveraged, the risk taken is also more.

According to Shobhit Agarwal, Joint MD — Capital Markets, Jones Lang Lasalle Meghraj, products like this should be more for low-risk–low-return investors, or most suited for risk-averse investors. Speaking to Express Estates, Dr Devinder Gupta, CMD, CENTURY 21 India, opined that with the formation of a stable government at the Centre, the realty sector has a high expectation from the new government. Fortunately, the sentiment part which has contributed significantly to make the market depressed in last FY 08-09 is now reversing and is reviving on optimistic side. These sentiments have a huge impact on the level of consumer confidence and reviving of market. This has been reflected in report coming from different cities showing revival of real estate transactions.



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