Introduction of REIT in Real Estate will reign transparency

Published: Friday, May 2, 2008, 21:04 [IST]

New Delhi, May 2 (UNI) In a bid to bring transparency to real estate industry and put a leash to spiralling prices, an early introduction of Real Estate Investment Trusts (REITs) is required.

Industry body Assocham has communicated this to Securities and Exchange Board of India (SEBI), stating that REITs can also help develop Commercial Mortgage Backed Securities (CMBS) market and create a source of cheaper debt for commercial real estate.

''Since purchase and sale of real estate assets would form part of the activity of REITs, the presence of a large number of REITs can enhance liquidity in the secondary market for commercial real estate,'' Assocham President, Venugopal N Dhoot said in a statement.

The increase in liquidity would make the sale of assets, if necessitated in CMBS structure easier, thereby improving the attractiveness of CMBS, he added.

The chamber has further pointed out that principal repayments to CMBS investors are made through refinance or sale of property, hence the enhanced liquidity in commercial real estate will make CMBS more viable, in terms of availability of refinance and quicker sale of property.

However, in the case of CMBS originated by a REIT, the REIT would own the property. As a financial investor, the REIT would be more inclined to let the CMBS trust enforce the mortgage and sell the property.

The REIT's franchise with its unit holdrs would improve if cuts its losses from a property that did not provide adequate returns.

CRISIL expects the legal risks associated with taking possession of and selling mortgaged properties to reduce considerably in the case of properties owned by REITs.

REITs typically own a variety of real estate properties, often even across geographies. Thus offering a pool of well-diversified properties of CMBS.

''This, results in a better spread of risks as compared to a regional developer who offers mortgages on a few similar properties often located in the same market space. Diversification will rescue the investors' overall market which will therefore improve the investment characteristics of CMBS and provide REITs with easier access to lower-cost debt funds,'' the statement from the chamber said.

Globally, the REIT industry has grown dramatically in size and importance. Tax benefits, and the ability that REITs give to small investors to access the real estate market, have been instrumental in REITs becoming increasingly popular in the US.

An important feature of US REITs is that they do not have an upper limit on leverage. To provide leveraged returns to unit holders, REITs borrow both in the form of unsecured debt and CMBS, the statement added.

There are 191 companies in US whose Sector Market Capitalisation are 221.06; Australia, 65 and 53.37; UK 26 and 31.75; France 26 and 31.75; Japan 42 and 24.40; Canada 35 and 13.59; Singapore 15 and 8.47; Hong Kong 5 and 3.95; Belgium 15 and 3.54; New Zealand 9 and 1.51; South Africa 5 and 1.35; Taiwan 7 and 0.94; Turkey 11 and 0.80, South Korea 12 and 0.67; Malaysia 14 and 0.65; Greece 2 and 0.38; Thailand 7 and 0.29 and Bulgaria 11 and 0.13.

''REITs can play an important role in the development of CMBS.

One of the main risk factors in CMBS is the legal process involved in enforcing mortgages on defaults by developers. The repossession and sale of property involves a legal process, which, in Indian conditions, may delay repayments to CMBS investors. This risk becomes even more pronounced when developers also own the property mortgaged,'' the statement said.

Developers may be influenced by franchise-related issues, and may not want to alienate the property even when unable to repay debt; they may then resort to legal means to stall the sale process, it added.

The US still accounts for over half of the global REIT market (53.2 per cent) although this percentage has been declining as a result of conversion of public REITs to private REITs in the US and REIT IPOs elsewhere.

The growth and increased profile of REIT markets has led to an increased level of specialist Global REIT funds being launched.

UNI BJR SR VC2040

 

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