Of REITs and REMFs

Real Estate Investment Trusts (REITs) act as an affordable, broad and balanced way of investing in the property market. Looking at the investment needs of developers who are instrumental to infrastructural development in India, primarily on real estate front, Securities and Exchange Board of India (SEBI) issued some draft guidelines for REITs. It is understood that SEBI is also issuing revised guidelines on Real Estate Mutual Funds (REMFs) to enable retail investors to access the realty market.Real Estate Investment Trusts (REITs) are a practical way for all investors to invest in large scale, income producing, professionally managed companies that own commercial real estate. India is in the process of formulating definitive legislation for the introduction and smooth functioning of REITs. Once it is introduced, it will help individual investors enjoy the benefits of owning an interest in the securitised real estate market. The best benefit will be of fast and easy liquidation of investments.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.The main technical difference between REIT and REMF is, the former is mandated to distribute at least 90 per cent of the gains it makes in a year to those holding its units. Secondly, a REIT can invest only in finished projects and not those that are under construction. While REITs help you earn a regular income, REMFs give you capital appreciation too.A REMF is a scheme much like any other closed-end mutual fund scheme except for the fact that the new entity will invest in real estate. According to conditions laid by SEBI, it is mandatory for an REMF to invest at least 35 per cent of its corpus in completed real assets. The second investment condition of SEBI mandates that at least 75 per cent of the corpus should be invested in real estate or related securities. Under this, your REMF can also invest in 'under-development' properties.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 other two long term consequences. It will be a major step in bringing the actual market rates of property in line with the registration basic values and will also facilitate market based price discovery for properties and financing the home purchases. With the entry of real estate mutual funds, builders will be hard- pressed to develop quality projects and leeway for sub standard construction practices will be considerably reduced. Real estate funds are expected to acquire real estate assets with quality blue chip tenants and focus on growing markets witnessing substantial urban development.