Last week SEBI announced that Real Estate Investment Trusts (REITs) would be permitted in India from early next year. REITs are mutual funds investing in real estate, and whose values are dependent on the values of the property it holds. As per the draft regulations unveiled, the REIT should be in the form of a trust created under the Indian Trusts Act, and the trustees should be either a scheduled bank, trust company of a scheduled bank, public financial institution, insurance company, or a corporate body. Every REIT launched should appoint an independent property valuer who will value all the real estate under the scheme, after field verification. They will all be closed-ended schemes, and will be listed on the stock exchanges.
Apart from giving a big boost to construction activity, broadening the real estate market, and making real estate a more organized business activity, REITs may have two major long term consequences
1. It will be a major step in bringing the actual market rates of property in line with the registration basic values. Presently land registrations are done at rates which are much below the actual transaction value. This differential, which comes from and goes into the black economy, is large proportion of the undercover economy. REITs will be a major step in rolling back this market.
2. By listing in the stock exchanges and with valuations reflecting the actual market values, REITs will facilitate market based price discovery for properties and the cost of financing home purchases. Presently there are no means of arriving at the market prices and financing rates.
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