It was in 2008 when the first time one Indian regulator used the word REIT. Many people in the industry got excited and the media said this will bring real estate within the reach of the common man and about US $ 10 billion will flow in.
I had seen the regulation and asked one senior fund manager. He said something interesting. He had asked 3 valuers in a B city to put a value to a nice office the amc had. He got values ranging from Rs. 6 lakhs to Rs. 10lakhs. He asked me a simple question: How do I arrive at the NAV on a weekly basis?
Another thing that people do not appreciate is the need for an extremely well developed back end. For e.g. If I am a fund manager I am not worried about the guy who is executing rigging the price. The price discovery is scientific, and cannot be manipulated. I mean the guy who is buying the share is buying it in the Recognised Stock exchange and the price is recorded by a 3rd party called the exchanges.
Now come to the Real Estate Industry – I have seen it long enough to know that the price between 2 flats in the same compound can be very different. I know of houses given on very different rates on RENT in the same building. For a fund manager it is very difficult to justify the price / ensuring that he does not get cheated. This is not easy.
Also the pain of getting the RE transferred, the costs, the legal hassles, – something which is not there in the Equity Market.
Also technically the fund manager managing a REIT will have a lot of restrictions regarding the valuation basis of the property, bad debts – rents not being paid on time, taxation (assuming all goes well REIT dividends could be tax free) but do not expect great yields. We are not a very high rental yield market – which means REIT would have to necessarily hope for a good capital gains market. In that market for capital gains there is a huge amount of competition from many lalas!!
So will REIT be a success? Well most things which succeed abroad may not succeed in India, so I am not willing to say it will be. Nor am I wiling to say that it will be a failure.
My view? Reit will not be a big success in India…and I thought so like that about mutual funds and cell phones too!! all d best….
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