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Can REIT address expectations of Indian Real Estate Investors?

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 Developments, Effects and Challenges of COVID-19 in India

CAN REIT ADDRESS EXPECTATIONS OF INDIAN REAL ESTATE

INVESTORS?

Dr. Harmeet Matharu

Assistant Professor, Department of Commerce (Finance & Marketing), St. Claret College, Bengaluru - 560 013, Karnataka, INDIA
Contact: +91 96320 85608; Email: harmeet1782@gmail.com, ORCID: 0000-0003-1636-8128

Vijaya Kittu Manda

Doctoral Research Scholar, GITAM Institute of Management,
GITAM Deemed to be University, Visakhapatnam - 530 045, Andhra Pradesh, INDIA
Contact: +91 98495 19188; Email: vijaykittu@hotmail.com, ORCID: 0000-0002-1680-8210

Abstract real estate is one of the most sought-after investment asset

Indian Real Estate investors got into an exciting phase classes for investors. The sector is subdivided into commercial,
with the capital market regulator SEBI allowing the listing of hospitality, housing, and retail sub-sectors with an increased
units of Real Estate Investment Trusts (REIT). With two demand for both offices and residential spaces in recent
REITs already listedand trading on stock exchanges, investors times. (Maiti, 2017)
now cannot invest indirectly in the real estate asset class yet The infrastructure sector is playing a vital role in
overcome the disadvantages that traditionally come with it. boosting the Indian economy, next only to the agricultural
This study attempts to understand the expectations of Indian sector. The financial crisis of 2008 occurred globally and
Real Estate Investors and discusses how emerging products weakened the environment of the Indian economy leading to
attempt to provide solutions. A survey with 268 respondents sluggish economic growth.
isconducted to understand their expectations on the
Demonetization negatively impacted the S&P BSE Realty
dimensions of liquidity, geographical diversification, taxation,
Index for the short-term because of fears of moving to a cash-
inflation protection of investment, and regular/stable rental
less formal system. It is well known that the Indian real estate
income are collected. The results were using statistical
sector is mostly cash-driven in the secondary market. However,
tools.The paper draws experiences from research undertaken
the demonetization impact disappeared after a few days
in other parts of the world to complement missed experiences.
meaning its impact is negligible for the long-term. (Nippani &
The research finds that REITs have the necessary Malhotra, 2020)
features to address the expectations of real estate investors. Liberalizationof FDIs and opening up of the real estate
Indian experience with REITs is in a nascent stage but has a market by the enactment of the Real Estate Act, 2016,
huge scope for development owing to the availability of substantially impact the economy. The infrastructure sector
sufficient investor interest. Easing of taxation and regulatory got a boom with the Government taking up an ambitious goal
requirements can help improve product penetration. Findings of providing a home for everyone by 2022 and bringing about
from this study can help financial services companies and the concept of Smart Cities across the country. Experts believe
regulators in designing better products. the infrastructure sector is expected to reach a market size of
Keywords : real estate investor, property prices, house prices, USD 1 trillion by the year 2030. Three phases of real estate
residential property, commercial property development in India during 2005-2015 are examined, and it is
found that REITs, Housing for All by 2022, Smart City Project,
JEL CLASSIFICATION tax reforms, and other government initiatives will boost
L85, R33, E62, G11 transparency and corporate governance in real estate, thereby
helping the growth of the industry.(Kumar, Chawla, & Mohanty,
INTRODUCTION 2018)
The Indian Real Estate is a vital sector for its economy.
Contributing seven percent to Gross Domestic Product (GDP), INVESTMENTS IN REAL ESTATE
it is the second-largest employer in the country. With the Investments in the real estate asset class are distinct
increasing population and growing income levels of the people, and different compared to other asset classes such as equities

ISBN : 978-93-5407-176-8 181 Govt. R.C. College of Commerce & Management, Bengaluru
 Developments, Effects and Challenges of COVID-19 in India

and gold. The number and size of transactions by small retail OBJECTIVES OF THE STUDY
investors in the real estate sector are fewer and almost 1. To understand the expectations of Indian Real Estate
entirely happen in the secondary market. The commercial and investors
office spaces business is mostly by family groups and
2. To analyze the preparedness of Indian investors towards
institutional investors.
REIT.
India announced a series of legislations and regulations
for REIT, GST, RERA, and Benami Transaction Act RESEARCH METHODOLOGY
strengthening. (Shah & Bhagat, 2019)Income levels do not The study uses a Mixed Research Approach by using
significantly influence the rise in housing prices in India, and a combination of Survey and Secondary Data Analysis
the absence of macroeconomic factors (GDP and House Price methods.
Index) appears to have supported irrational consumer
expectations. (Parrikar, 2019) DATA COLLECTION & ANALYSIS
The study uses both primary and secondary sources.
Foreign investments in the sector are necessary to reach
Primary data comes from a survey with respondents from 23
the ambitious mission targets set out by the Government.
Indian states above the age of 30years who expressed their
Though yet to take the test of time, the enactment of the
expectations from real estate investing and views related to
Indian Real Estate Act, 2016, has the potential of fueling
their preferences to REIT. The researchers made an attempt to
inflows from foreign direct investment (FDI) into the country.
analyze the responses received through the survey by using
(Gupta, Sawhney, Bajaj, & Agarwal, 2017)
various statistical methods.
Recent trends are that not just institutional investors
but even non-residential Indians (NRIs), with their inward The survey data is analyzed using various statistical
remittances back home, were instrumental in channeling tools to get empirical backing to the views expressed by
investments into the sector. Key factors supporting this survey participants. The first test the data sample is subjected
include: A large number of non-residential Indians abroad, a to is Cronbach’s Alpha. Though not a strict statistical test,
considerable amount of inward remittances to India, Cronbach’s Alpha is used to test internal consistency so that
deprecation tendency of Indian currency, government policies an understanding of how closely related a set of items are as
and non-residential Indian investments in the residential sector, a group. Descriptive statistics are then computed and reported.
focus on amenities, sustainability, and urban design, high
gross domestic product growth rate and infrastructure Secondary data sources were used for collecting
expansion, demand and supply mismatch in Indian residential information necessary for this study. The data is collected
real estate and real estate marketing strategies are found to be from several journals, research papers, websites, including
critical deciding factors. (Tiwari & Aljoufie, 2016) from the official websites of both the REIT companies and
other agencies and annual reports.
Though studies established that workplace cultures are
necessitating Indians to shift their investments to other RESEARCH FINDINGS
counties (such as Dubai, UAE), even in real estate and The Descriptive Statistics of the survey data are reported
infrastructure sectors(Rao, 2019), India by itself still has a in Table 1.
compelling investment story.
Table 1: Descriptive Statistics
Like investors in any other class, investor behavioral
bias exists in real estate too. The research established that
investment satisfaction is found to have significant and
complementary partial mediating effects. (Pandey & Jessica,
2019)

A systemic review on the topic regarding residential

property investor types has organized meta-categories on the
topic as spatial scales of operation, size and social composition,
investment objective and finance, and investment and social Data Source: Author compilation
behavior. (Grant, 2019)

Govt. R.C. College of Commerce & Management, Bengaluru 182 ISBN : 978-93-5407-176-8
 Developments, Effects and Challenges of COVID-19 in India

The summary findings from the data are as follows: their funds, giving the responsibility for its management to a
trust.
O A very small portion of investors invests in real estate.
Within such investors, residential properties are more The capital markets regulator - the Securities Exchange
preferred over commercial properties. Board of India (SEBI) had first notified REITs and InvIT
O The median age of Indians is 28.1 years, as per the 2018 Regulations in 2014, allowing setting up and listing of such
CIA World Factbook. (CIA, 2018) This means to say trusts, which are popular in some developed markets.
that even those who have bought a real estate property According to the regulations, REITs are meant for investments
for investment have not yet completed a sell translation in rented and commercial properties and thereby providing
and thereby have not yet booked their profit. This is type, concentration, and location diversification to its
investors. (Rohaya & Hishamuddin, 2015). These diversification
confirmed with 65% of respondents confirming they
features can greatly reduce investor risk.
have not completed both a buy and a sell transaction
involving a real estate property. Investments broadly give two forms of returns to its
O Liquidity and inflation protection of investment from investors- dividends or such intermediate benefits and capital
inflation play a very important role when it comes to appreciation that gets realized at the time of selling the
investing in real estate. investment at the end. The real estate sector provides this in
two forms.It gets rental income when the property is rented
O 66.8% of the respondents say they have heard of REITs.
to a tenant (client). Secondly, the property value appreciates
However, 88.1% of them have never invested in a REIT.
over time, thereby giving capital appreciation. The rate of
O Hardly 6% of respondents have invested in Embassy returns will, of course, depend on the location, infrastructure,
Officeparks REIT, and only 5% invested in Mindspace and industrial growth around that area. REITs juggle these
Businessparks REIT. A healthy 6% invested in both risks through a diversified portfolio of properties. The risk
REITs meaning that those who are aware of REITs are management part of real estate investing gets reduced with as
active and are interested in the concept. much as 80 percent of the value of the REIT going into fully
O Real estate is subject to volatility as it has already completed and rent-generating assets. SEBI regulations insist
witnessed situations like the sub-prime crisis; however, that the investment vehicle be professional management with
it is an excellent source for passive income. specified years of experience under the onus of a trust.

O Safety, regular return, and liquidity arethe key factors REIT has become an emerging tool and was even
that influence real estate investor preferences. successful in catching the attention of large-sized domestic
and foreign institutional investors, as evident from the anchor
DISCUSSION book of the two REITs. Apart from stock-exchange listed
REIT LANDSCAPE IN INDIA products, there are several non-listed real estate funds (NREFs)
Not all is rosy for the real sector that was haunted by as well, the risks of which are slightly different. (Gupta,
a liquidity crunch on account of unsold inventory on one Newell, Bajaj, & Mandal, 2018)
side, and the low demand on the other. In some cases, A large portion of real estate investments is through
projects are stuck in limbo because of process bottlenecks REITs in several countries such as the US (96 percent),
and capital deprivation to developers. Several such factors Singapore (55 percent), Japan (51 percent), and Malaysia (42
necessitated the introduction of new and emerging financial percent). India is a late entrant on the REIT charts. The real
engineering products such as Real Estate Investment Trust estate market cap from Embassy Officeparks is a mere 17%,
(REIT). REITs promised the much-needed help for cash- and with the recent Mindspace Businessparks listing, it is
strapped developers to monetize their existing property. now expected to be 29 percent of the total real estate market-
cap.(ET Contributors, 2020)
A REIT works on similar lines of a mutual fund by
pooling money, investing in the real estate asset class, and Funding commercial real estate is a critical factor, and
distributing the proceeds back to the investors. It is a large- with REIT regulations insisting on minimum asset valuation to
scale investment vehicle where like-minded investors pool be a minimum of Rs. 500 crores, not all commercial property

ISBN : 978-93-5407-176-8 183 Govt. R.C. College of Commerce & Management, Bengaluru
 Developments, Effects and Challenges of COVID-19 in India

portfolio developers and owners can take the REIT route. from an SPV or dividend referred to in Section 115(O)(7) of the
(Chowdary & Kishore, 2019) Income-Tax Act.Any income generated through rentals or
leasing does not form a part of the total income under Section
LIQUIDITY 10(23FCA). The taxability of unitholders is governed by the
Studies showed that REITs are as liquid as equity provisions of section 115UA of the Act.As per Section 115UA,
instruments even at times of financial crisis and recessions income distributed by business trust to its unit holders shall
(GFC and COVID-19), making them have a compelling benefit be treated of the same nature and in the same proportion as
against direct real estate investments. (Bergström & Carlsson, the trust receives it.
2020)
Taxation treatment slightly changed effective April 1,
From the perspective of construction companies, globally, 2020, after the taxation of dividends is revisited. The dividends
profitability from real estate activities fall between industrial from REITs, which were exempt from being returns from SPVs,
construction and infrastructure. The profitability is primarily are now taxable. Parliament modified the tax reforms by
driven by liquidity. (Jolly Cyril & Singla, 2020) Real Estate authorizing the Finance Bill, according to whether or not the
projects are capital intensive, and project completion takes SPV opted for the newly proposed concessional corporate tax
much time. The real estate company needs to remain solvent. scheme. Tax residence of investors, if the SPV can opt for the
Liquidity analysis (current ratio, quick ratio, cash to current concessional corporate tax system, and the debt-equity ratio
assets ratio, cash turnover ratio) and such various gives us at the SPV level will be the primary structuring considerations
insights on the liquidity of a company. (Kirti, Maan, & Kala, from an overall perspective. Concerning the issue of cashflow,
2020) where the SPV withholds tax on dividend distribution, one
may approach the Government for clarification or follow the
GEOGRAPHICAL DIVERSIFICATION procedure of obtaining a tax certificate withholding zero. (Ritu
Traditional real estate investments do not provide & Bajaj, 2020)
geographic diversification. Individual investors can only deploy
INFLATION PROTECTION OF INVESTMENT
their money into one or rarely in fewer geographies. REITs
Equity and real estate are two different horizons of
overcome this disadvantage, but then again, when investors
investing, and both have their cons and pros that an investor
invest in multiple REITs, they have the additional burden of
should seriously consider before investing. (Colaso & Rao,
ensuring that overlaps between REITs are reduced and even
2016) Inflation protection is an important reason investor put
eliminated to the extent possible. Since Indian REIT investors
their money into real estate. Since researchers cannot conduct
only have two REITs listed so far, ensuring low geographic
localized studies across a wide geography, particularly in a
overlap is more manageable and can best be done once in a
country like India, one simple and yet reasonable route is to
quarter, usually at a time when companies make their
take a stock market-linked index, which should ideally be
disclosures. Research shows that geographic concentration is treated as a proxy to the real estate market as a whole.
associated with higher REIT values for firms that can be
described as being less transparent.(Zhilan, Maneechit, Price, However, inflation and stock market return are parts of
& Sirmans, 2019) systematic risk that cannot be controlled by them. Several
studies revealed that is no association between inflation and
TAXATION Realty Index Return (RIR) and that market return and RIR also
Taxation is an essential factor in investing. Indian taxation do not cause inflation. (Upadhyay, 2019)
focusses on the differentiation of an investment as equity and
REGULAR/STABLE RENTAL INCOME
non-equity. This parity has made REIT and InvITs to be taxed
as equity, giving an advantage for such investors. Taxation Positive cash flows are necessary so as to distribute
systems fundamentally need to be neutral. India’s existing income regularly for investors in the form of dividends.
taxation system is not neutral and hence requires a re-look Experience from Thailand shows that REIT IPOs with income
from a policy perspective. (Tandon, 2020) guarantee are much less underpriced on average, have lower
systematic risk and returns, thereby making them look like
REITs have been given a pass-through status under more of a debt-asset class over an equity-asset class.
Section 10(23FC) concerninginterest received or receivable (Saengchote & Charoenpanich, 2020)

Govt. R.C. College of Commerce & Management, Bengaluru 184 ISBN : 978-93-5407-176-8
 Developments, Effects and Challenges of COVID-19 in India

48 percentof respondents say regular/stable income is CONCLUSIONS

“very important,” while 35 percent said it is “important,” REIT addresses the liquidity, geographical diversification,
which means that it is a leading reason why investors put taxation, and inflation protection of returns and hence can be
their money in a REIT. seriously considered by real estate investors. India currently
SCOPE FOR FURTHER RESEARCH has only two listed REITs, but being a country with serval
developers and construction projects on one side and savvy
1. Corporate governance and disclosures of REITs are
investors on the other side, both the demand-supply aspects
worth studying.
can be well addressed. Increased awareness of REIT products
2. Shareholding pattern related studies can give us insights
and encouraging mutual fund participation will increase
if REIT IPO investments are held for long periods in the
product penetration. Small retail investors need to identify
same way that real estate properties were held.
their motive or goal of investment and can consider REIT to
3. Investment patterns by DII and FIIs in the REIT sector widen their portfolio scope using REITs and thereby to
can be studied. Further, the extent of investments of lookbeyond the traditional form of real estate investment. A
Mutual Funds in REITs is worth studying. The topics lot more reforms are needed to shift the investor’s attention
also can go deeper into studying systemic risk in the from the unorganized sector to the formal electronic form of
system. investing in the real estate asset class.
RECOMMENDATIONS CONFLICTS OF INTERESTS
O The major expectation as an owner of any kind of real The first author (HM) has no investor exposure to
estate is that the rate of the premises should keep on REITs in any form.The second author (VKM) declares that
increasing along with a certain increase in rentals too. being an investment trainer, he has been teaching on various
So, a certain amount or percentage of ROI (Return on investment products, including real estate asset class and
Investment) keep on coming.
REIT as an investment product. Further, being an investor, he
O Simple and hassle-free buy or sell approach. Brokers is having investment exposure to Indian REITs in his individual
and real estate companies are often treated as big frauds capacity.
and lawbreakersof the country. The moment they receive
some payments, and the dealer receives brokerage, their FUNDING
tone and behavior change. Strict regulations towards The authors performed the research in their individual/
customer protection are required though sufficient personal capacity and have not received any funding for this
progress was made in the recent past by legislation research from any institution or a funding agency.
amendment.
ACKNOWLEDGEMENTS
O The investment should be hassle-free, litigation-free and
transparent transactions, regular income, quick liquidity, The authors wish to thank Dr. Aruna Polisetty of
and inflation-protected income GIM, GITAM Deemed to be University, Visakhapatnam,
for her inputs. The authors also wish to thank Sujatha
· Investor awareness programs should be made on REITs
Pentireddi (GIM, GITAM) and Divya Varma (KWJ) for their
by the stock exchanges and the REIT companies.
support.
FUTURE OF REITS IN INDIA
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