Real Estate Investment Trusts enable retail investors to participate in the Real estate market as easily as they can participate in equity markets. A REIT is a portfolio of income-producing and secured real estate assets that provides a regular return to its investors.
The REIT structure allows retail investors to invest in Realty, a highly overpriced asset class that currently requires substantial capital. Other similar asset classes, like Gold, can be bought and sold through mutual funds. As an asset class, real estate in India was out of reach for retail investors until now. With the introduction of REITs, retail investors can now include real estate in their portfolio.
Currently, the real estate market is very opaque. Given the fact that REITs will be highly regulated, a lot of transparency in the sector will be brought about, as well as much-needed low-cost equity capital. Currently, the real estate sector is financed almost exclusively by high-cost debt.
One must keep in mind that REITs are still in a very infancy stage in the country. Both regulators and policymakers must also examine recently opened markets to come up with a strong & supportive policy framework. In order to achieve a sustainable model, investment in REITs must be raised, managed and deployed in an appropriate way.
In addition, there is the question of who can form and manage REITs? If real estate companies are allowed to form REITs instead of independent REIT managers, there is a high likelihood of conflict of interest.
In the highly sluggish real estate sector, REITs can be a game changer. Interest in REITs is increasing from both manufacturers and investors. However, more clarity is needed on how this system will be regulated.