The Indian real estate sector is set to witness another game changer after RERA. The country plans to launch its first Real Estate Investment Trust (REIT) in a few months and today we try to decode what this means for you.

What is REIT?

A Real Estate Investment Trust (REIT) is an entity (trust) that will pool money from individual investors into infrastructure projects through a stock exchange and shall provide them with a dividend for their investment. An REIT is modeled on the structure of a mutual fund.

Why introduce REIT in India?

Indian real estate market faces challenges of appreciation. With the introduction of REIT, developers with low funds can monetize their existing property or raise funds for new projects from the general public. In the real estate sector, both rent and capital appreciation from property depend on the location, infrastructure and industrial development around that area. REITs solve these risks through a diversified portfolio of properties.

How does it work?

REITs in India will be monitored by the Securities Exchange Board of India (SEBI). The REIT will raise money by listing itself for an Initial Public Offering (IPO) where people can invest in the property market with a minimum amount of ₹2 lacs (primary market). As per SEBI guidelines, the REIT is bound to distribute a minimum of 90% of the income earned to investors on a half-yearly basis.

Similarly, 90% of sale proceeds are also paid out to unit holders unless the amount is reinvested in another property. Thus, one receives a regular income and also benefits from price appreciation.

SEBI has kept the minimum requirement for asset sizes permitted to be listed in India at ₹500 crore, while the minimum issue size of the initial public offer should not be less than ₹250 crore.

Guidelines also state that the REITs will have to invest in at least two projects with not more than 60% value of assets will be in one project.

Not less than 80% of the assets should be invested in completed and revenue-generating properties. The rest 20% can be invested in under-construction properties, mortgage-backed securities, listed/unlisted debt of companies in the real estate sector, equity shares of listed companies which derive not less than 75% of their operating income from real estate activity, G-secs and money market instruments and cash equivalents.

Although the Indian government gave a nod to REITs in the year 2012, the framework took about six years to be built and is now set to introduce the first REIT in the nation.

As per various media reports, Embassy Group, an Indian partner of Blackstone Group LP and a commercial real estate developer, is set to launch nation's first real estate investment trust. There will probably be some progress by June, Embassy Office Parks Chief Executive Officer Michael Holland said of its plan to issue the bond-like securities. A draft prospectus may be filed by mid-year with the listing to follow a few months after, reported media.

What does it have for you?

In an interview with Business Today, Neeraj Bansal, partner and head of real estate and construction practice, KPMG said that REITs are for investors who want to diversify their assets beyond gold and equity markets.

Experts believe that REITs tend to provide high dividends besides having the potential for moderate and long-term capital appreciation. REIT dividends are substantial because they are required to distribute at least 90% of their income to the shareholders annually. Their dividends are fuelled by the stable stream of contractual rents.

Because of the strong dividend income REITs provide, they are an important investment both for retirement savers and for retirees who require a continuing income stream to meet their living expenses.

REITs can reduce the risk related to your property investments as 80% of the value of the REIT should be in completed and rent-generating assets, which are required to be run by professional management with specified years of experience notified by SEBI.