Impact of REITs and ResiTel Ownership in the Real Estate Market

14 Feb 2022 , 03:29 PM

Real Estate Investment Trusts, or REITs, are a prominent vehicle used in most developed and developing markets across the globe by owners of commercial rent-yielding realty assets to gain liquidity, and by retail investors to generate income from real estate projects. This model has been operating successfully in countries like The United States of America, Singapore, China and numerous parts of Europe for several years now. In 2014, the government of India and SEBI released guidelines for introduction of REITs in the country. Even though the market took some time to adopt this product, today, such listings are doing very well in the Indian subcontinent, as they give very differentiated investment options for property investors.

Coming to ResiTel, what is it? ResiTel allows retail property buyers to own secured hospitality real estate assets such as resort suites or hotel apartments for income yield purposes. The earnings through this instrument are significantly higher than those generated from traditional residential assets. In addition, since these are not listed like REITs, they are not susceptible to volatiles of capital values and capital erosion which is possible in listed REITs.

Having said that, the three registered and functional REITs in India have emerged very promisingly, and their capital value has remained positive. SEBI has also brought down the value of minimum capital investment required for an individual retail investor to invest in an REIT, to as little as Rs10,000 to 15,000.

This indicates the vast market that these instruments can cater to – right from pensions, endowment funds, institutions and HNIs, to everyday individuals such as middle-income professionals looking to build some capital or a secured income stream. The introduction of REITs and ResiTel is also very timely because the conventional fixed-income products offered by banks have given lower returns in recent years. Therefore these real estate backed assets have provided investors with a more lucrative avenue for generating income as against the legacy Fixed Deposit methods.

In a country like India, where inflation is always on the rise, the advantage with products like ResiTel and REITs is that they are inflation-linked and adjusted, which helps investors in negating the impact of inflation on their investments. Further, these tools have brought structure to the realty sector. Today, developers think about the future exit of their commercial / hospitality property before laying down its foundation. Only if the market participants structure the development of their assets properly; will they be able to get the maximum return out of them in the future via tools like REITs. This has given all parties involved in the real estate market a substantial impetus to change the approach with which they build their projects & businesses.

The accelerated adoption of these products will attract more investments in this industry. With the rapid acceptance of such instruments, it is safe to say that the Indian realty industry is maturing, and we are bound to see more positive growth in the days to come.

The author of this article is Vaibhav Jatia, Managing Director, Rhythm ResiTel

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com