What Next to REITS
The investment in gold and property is at the core of our savings character and this needs to be diverted towards REITs. — Alok Singh
The Real Estate Investment Trusts (REITs) have provided an opportunity for fractional ownership in expensive real estate properties to even small investors. The first REIT was listed in Bharat post-demonetization and post-GST implementation. The Embassy Office Park was the first REIT to be listed in the month of March 2019 on the National Stock Exchange of India (NSE). Blackstone, an American investment banker had a huge stake in this indigenous REIT and later they diluted their stake after making a lot of money in a short duration of time. The listed REITs to the general public behave like a mutual fund as there is no lock-in period and the investors can sell and buy it on stock exchanges whenever the stock market is open for business.
The ownership gets transferred easily and the monetary transaction happens smoothly. It’s simply unimaginable to sell or buy and get the monetary transactions completed in a single day by just sitting at home before the year 2019 in the real estate business and that too in commercial real estate buildings. It’s possible today. The awareness about REIT is lacking among the investors of real estate and this lacking is providing an opportunity for foreign investment bankers to make money easily.
Before the arrival of REITs, the office space occupants had to negotiate with the property owners and the brokers by phone, by e-mail, and in person, usually over a sequence of meetings to finalize the deal. This consumed a lot of time and a lot of customization and interpretation of rent contracts and multiple layers of documentation. Moreover, if the current owner of the property wants to encash the property for other requirements including the urgent requirement of money, then they have to do the deal at a huge discount i.e., the earlier model of commercial real estate ownership didn’t provide enough opportunity for the fair deal to small owners in the small window of time and situations of urgency diluted their chance to wait to meet the monetary target. REITs have characteristics of real estate and stock equity. It can incorporate further character that is more inclusive in nature like the character of more inclination towards Cooperatives.
The cooperative script is being rewritten. The Union Home Minister himself is the union cooperatives minister. The Cooperative’s majority stake of control lies with the state government. There is a concept of multi-state cooperatives to promote the same cooperative’s work domain in multiple states. The REITs usually have properties in multiple locations and they follow the local land laws and other related laws of the specific state. Currently, REITs are best positioned as a variant of mutual funds. The characteristics of mutual funds mean that it is regulated, fractional ownership among unknowns in real estate is a new concept, and cooperatives are arriving in new formats.
The Commercial Real Estate Multi-State cooperatives can be a product of cooperatives law that can encourage small investors to participate in fractional ownership of commercial buildings like office spaces, hotels, amusement parks, and others.
The next thought is whether the Cooperatives in their character can be listed in stock exchanges so that the fractional owners have more flexibility to encash their investments more frequently. The decision-making process in cooperative Society and in big corporates differs. The government has redefined the limits for a REIT. Its eligibility has been favorably decreased from an asset value of five hundred crores to fifty crores. It has been further characterized as a big, medium, and small REIT. It has a condition that ninety percent of the profit is distributed among the existing fractional owners rather than investing consistently in new projects. The penetration of cheap data and affordable handheld in the deep hinterland of the nation has encouraged the population to invest and trade in stock exchanges. The REIT should target these investors to participate in the fractional ownership of commercial real estate buildings to curb the REIT as an ‘easy money-making machine in short duration’ to foreign investment bankers and other foreign institutional investors.
The occupancy and income of our listed REITs are rising in a time when the world is transiting through a fragile economic situation. The success reflected in the demand of office space speaks for itself. Working from home has become a new culture for productivity and efficiency but the rising demand for office spaces shows the robustness of our economy. It reflects as a proxy of our stable and growing economy and rising job opportunities. The investment in gold and property is at the core of our savings character and this needs to be diverted towards REITs. The foreign money-making machines like BlackStone and Black-Rock have to be dispersed by our indigenous “Kala Pathar” i.e., indigenous money of small investors.
(Alok Singh is a fellow of the Indian Institute of Management Indore and is currently engaged as a freelancer academician located in New Delhi.)
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