REIT stands forÂ Real Estate Investment Trust and is a type of a mutual fund. REITs are fairly common in the US and while SEBI had a proposal to allow them in India a few years ago, not much progress has been made since then.
Just like any other mutual fund – the REIT operators will get the money from the public and then invest it in real estate with the primary motive of earning income on it.Â In the US, they have to distribute most of their income as dividends and that would probably be how they work in India as well.
In an American context, this works great because the interest on fixed deposits is zero, and rental yield is decent but India is very different from the US in that way. Here the rental yields are low, and the fixed deposit rates are high so a REIT’s appeal will be more by way of capital gains than yields.
Right now, those who can afford it — buy houses with the hope of capital appreciation, and they don’t care about rental incomes at all. I would imagine that if REITs were traded in India then the same will be true for those also.
People who buy REITs will be interested in capital appreciation rather than looking for any type of yield or steady income.
I think the idea behind allowing REITs in India is to get money flowing in real estate and getting real estate developed with this money so that the demand and supply gap is bridged.
However, I think the gap is not so much because there is shortage of money but because of other administrative problems like land acquisition and clearances so to that extent the introduction of REITs may not help with that.
There was some hope that there will be something about REITs in the budget this year but there wasn’t and I haven’t read anything else that suggests that it is likely to materialize in the near future.
If there is something, I’ll do another post with the details of regulation and how they are likely to function, but I honestly don’t feel that they will have a lot of utility in India.
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