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REIT Thing

Want to invest in real estate but don't have enough capital? Well, here's your chance thanks to SEBI's new proposal - Real Estate Investment Trust. Find out more about REITs…

This year has certainly brought a lot of cheer to mutual fund investors. And we are not talking of the number and type of schemes available for investors to consider. We are talking of two major developments that have been hogging the limelight. One is the waiver of the entry load for investors who directly buy the units of their scheme from the mutual fund. The other is the draft proposal by the Securities and Exchange Board of India (SEBI) on REITs.

REIT is an abbreviation for real estate investment trust. It is a collective investment which pools investors' money - exactly what a mutual fund is all about. The only different here is the asset class. It is not equity or debt but real estate. So by buying the units of a REIT, investors can invest in real estate without owning physical property. Or, to put it in the right jargon, without buying bricks and mortar.

Then again, it is not a real estate fund in the literal sense of the word. It is an income-producing real estate asset. For instance, the investment here will not be into property that is to be developed for residential purposes and then sold to home owners. Instead, the investment trust will invest in properties which are leased. So the property would generally be shopping centres, office buildings, industrial units, cinemas and malls. In some countries it would even include hospitals and residential space.

While abroad REITs can own, develop and operate commercial properties, SEBI plans to ban them from investing in land and property development and has suggested only developed properties that earn a rental income.

While this is new in India, it is certainly not a novel concept. REITs are already popular in the US, UK, France, Australia and Japan.

Real estate, as an investment, was always out of the reach of retail investors because of the huge capital required. But private equity firms have been cashing in on the real estate boom. According to reports, nearly Rs 25,000 crore was pumped into real estate and infrastructure in 2007 by way of private equity. Now, retail investors can have a slice of that pie.

It also scores high on convenience. You don't have the hassle of buying and selling property. Here you just have units to contend with. Since REITs will not be open-ended but close-ended schemes, their units will be listed on the stock exchange to offer investors liquidity. So here is one asset class that is now made more accessible. Make use of it and diversify your portfolio.

Proposals put forth by SEBI
- The REIT will be created under the Indian Trusts Act and regulated by SEBI
- Banks, public financial institutions, insurance companies and corporate houses can be trustees of REITs
- At least 50 per cent of the trustees of the REIT and its management company should be independent and not directly or indirectly associated with those who have control over the trust or management company
- The trust and management companies are required to be registered with SEBI and should have a net worth of at least Rs 5 crore
- Before launch, the schemes would have to be valued by a principal valuer empanelled with SEBI
- REITs will be barred from making investments in vacant land
- None of their schemes should have more than 15 per cent exposure to a single property project
- None of the schemes should have more than 25 per cent exposure to real estate projects developed, marketed, owned or financed by a single group of companies