With the new government at the center passing the bill for Real Estate Investment Trust (REITs), the Indian commercial real estate will be the next big thing in 2015. As the Realty sector has been reeling under an acute shortage of funds, this proposal will give a much-needed boost to the sector.
Real Estate sector is among the fastest growing industries in India. The market size of this sector is expected to grow to Rs. 3,000 crores in the next 5 years. The growth rate is already moving upwards, with major cities recording 40% sales in the last quarter of 2014.
The demand for office spaces in the major cities (Delhi, Bangalore, Mumbai, Pune, Gurgaon, NOIDA) has been all time high in 2014. The figures are simply staggering, with 58% increase in their demand and supply in just one year.
The demand in the housing sector has also increased by 43% in the major cities. The residential sector has a tremendous potential for growth due to the increasing demand of residential units for a rapidly budding urban population. In the coming years it is anticipated that the urban population will grow up to 600 million people will live in the cities.
Indian Real Estate is highly favorable for global investment because of the rising demands for development. The demand for space has created a massive opportunity in the Indian Realty sector.
What is a REIT?
Real Estate Investment Trust (REIT) operates like a mutual fund trust which generates income from residential and commercial buildings. Investors are driven to invest in an Infrastructural project that gives them a high return on their investments, which is tax exempted. The profits paid to the investors and shareholders are in the form of Dividends, which is tax-free.
Anyone can purchase stock like they would in other industries. Investment is direct and easy with the REIT. The shareholders earn a steady income from the share they own and it’s not necessary to own the property to make profits.
There are two types of REIT’s
- Equity REIT
- Mortgage REIT
The Equity Real Estate Investment Trust generates incomes based on the rent, while the Mortgage REIT earns from long term mortgages, both residential and commercial.
A Realtor can buy, develop and sell the properties while managing the property. REIT invites investors for professionally managed properties, anticipated to numerous advantages over the conventional methods.
There are many Advantages to REIT’s as compared to the traditional method of investment. REIT’s in India will be very stable and offer uniform returns to the investors, because;
- No autocracy involved and the process will be administered by the professionals directly.
- REIT makes it easier for the purchase of Realty stocks for large and small investors.
- REIT will stabilize the Real Estate industry from market volatility.
- REIT will make the real estate transactions transparent.
- Investors can get a tax exemption from the government upon opting for REITs.
- The REIT can bring good returns to the investors.
The REIT has certain guidelines to be followed that are passed by the government.
- It has to be registered as a trust and raise funds through an initial public offer.
- The REIT should be able to gather Rs. 250 crores minimum.
- The distributed cash flow should be a minimum of 90% to be distributed as dividends to shareholders.
- There are two possibilities of earnings for a shareholder. One is by selling the capital and other on dividend income.
Importance of REITs
The Indian Real Estate industry plays a pivotal role in the country’s economy. With REITS the industry will contribute majorly to the expected 6.5% increase in GDP in 2015.
The Housing industry is the 2nd largest industry in India, according to recent statistics. The real estate connects more than 300 industries and it indicates how significant the real estate industry is to the Indian economy.
Real estate is the 3rd most impacting industry in India and creates severe volatility in the economy. It is the 4th most employment generating industry in the country. Residential sector takes the largest share in the real estate industry by creating schools, apartments, malls, restaurants, hospitals and hotels. The construction industry has the power to directly impact the manufacturing sector in the country. Due to its tremendous potential, the Realty Sector attracts Foreign Direct Investment (FDI) into the country.
The situation of real estate in 2014 is of great importance to notice. Colliers research found that Bangalore and Chennai to have the highest demand in the real estate industry by creating demand for residential and office buildings. There was a delay in clearance and numerous backlogs in the real estate. There was about 2% growth in the construction industry.
What is expected in 2015 after the introduction of the Real Estate Investment Trust?
As per the IMF and World Bank statics, India’s GDP will touch 6.5% mark in 2015. The reports further predict that an 11% growth in the residential and commercial segemnets will be witnessed in the metropolitan cities, namely Delhi, Gurgaon, Chennai, Pune, Mumbai, NOIDA, and Bangalore. The market growth of Construction is expected to be 20% by the end of 2017. REIT will thus make a great impact on the Indian real estate business by welcoming the capital. This year will be mostly focused on finishing the pending projects in the real estate. Improvement in the rupee in 2015 can bring great ease to the developers in the real estate industry.
Real estate can prove to be the propeller of the Indian economy after the introduction of the REIT in to the industry. This development in the industry will boost the growth in the country’s economy and improve the urban area. It will raise the employment rate by a notable margin which is very important for the economy and the overall development of the country.
The Real Estate Investment Trust will bring a new source of capital for the developers which will motivate them to improve the quality of their projects. It will greatly improve the infrastructure of the cities by developing a variety of necessary buildings and structures. The RBI is likely to cut the interest rates and make it easier for the developers to bring in the much needed capital to the project.
The Real Estate Investment Trust has definitely lifted the expectations of the developers and investors in the country. It is expected to speed up the development of the country which is the need of the hour.