Saturday, July 14, 2007

Indian Real Estate and Real Estate Investment Trust

A."REIT rhymes with ‘sweet’":

The right pronunciation of 'REIT' in English rhymes with "sweet" says Mr.D. Murali in The Hindu. I pronounced 'REIT' several times but it never sound 'sweet'! "Every morning I am going to do loud reading of The Hindu to improve my diction" I announced. But, my wife found out the other article by the same author. There she found out, 'REIT' is pronounced as 'REET'! So sweet of her.

What is REIT?

In its simplest form, REIT is a way of securitising property; it breaks down the ownership of one or more buildings into units that are sold to investors and usually listed on the stock market, writes Mr.Murali.

B. Benefits for Developer:

B1. You can have the cake and eat it too:

For the developer REIT is more profitable than keeping the ownership of the property and earning lease.
1. Developer constructs a property and gives it on lease.
2. Developer sets up REIT. But retains 30% stake.
3. Developer gets funds -- 70% of the value from the retail investors.
4. Indirectly, property is still in the developer's control!
5. Developer sets up REIT management firm and earns additional income from fees for managing (his) REIT.
6. Of course, income from lease and rent continues.

B2. Recycle Your Capital: Your unlocked funds keep on multiplying:

Now you have got your 70 % funds back. Which you can use in a new project. As soon as this project is ready you can sell it to your REIT and thus go on and on. Obviously, with every project you are going to multiply your funds and earn lots more than the lease.

C.Benefits for retail investors:

C1.From an investor’s perspective, units in a REIT are instruments for investment in addition to shares, units of mutual funds and bonds (government or private).

C2.The Satisfaction of 'Ownership of Property'

Thanks to Late Shri Dhirubhai, because of him we have an investor culture in India. Over a period, Indian investors have learned to give more value to 'the satisfaction of ownership' than to the amount of money they receive as a dividend. Every time when i am in Navi Mumbai, because of my couple of shares, i feel so proud of my companies and i wonder how much more satisfied i would have been if Anil and Mukesh would have had a couple of more brothers! But remember, you are going to give me that kind of satisfaction which i yearned for ages. Now you and your REIT is going to give the satisfaction of ownership of property, say for example a software park. Security may not let me go in, so what? Honor of owning a piece of property is great. Ask any Indian!

C3.Investor can become a millionaire by retirement!

Or he can provide for the fees of his new born baby when it gets admission to the junior college. Because REIT generally pay good dividends. Unbelievable but true. According to Mr. Dominic Whiting, Author Of ‘PLAYING THE REITS GAME’ in US REITs have paid around 13% average returns for last two decades! You have to be invested in your REIT for next 25/30 years. I am sure, considering RBIs negative opinion about funding real estate, you can make up your mind to give that much returns to your REIT's investors.

C4.How much?

Why Singapore?:

1. Since you can not set REIT in India you have to go overseas. Yes, Middle east is an option, but they say Singapore is better.
2. Singapore allows you to package your properties in India into your Singapore listed REIT.
3. Singapore offers tax exemption for corporates as well as individuals.
4. Singapore has a limit of 60% on debt gearing so you can acquire more funds than you can in Hong Kong.

REITs increase the valuation of the property:

As per Mr.Whiting, because of the tax exemptions and less expectations of the investors, REITs pay more - you get better rate for your property; transact more - increase in the numbers of transactions; so market value of the properties increases. We always enjoy price rise, isn't it?

Investment Grade Buildings:

This is a serious issue. We have very less Investment Grade Buildings. Out of 300$ Billion worth of commercial buildings only $83 Billion can be considered as Investment Grade. It means we have a lot of scope to improve the quality.

Indian real estate bubble:

"A REIT market in India could take off if the current boom turns into some kind of bust." As per Mr. Whiting, in US as well as in Japan, growth of REIT has happened only when market was low. So he expects for the sake of the growth of the REIT something should happen in our market!? Do you think current boom is only a bubble?

Indian real estate news:

“The Indian real estate is hampered by poor foreclosure laws, tedious property registration processes, tax and transaction laws that vary by the state and frequent contests over property ownership.” says Mr. Whiting. This is not a news for us. Is it?

Why India and China are reluctant to introduce REIT?:

"It is felt by some people that REITs have a heating effect on a country’s property market. However, REITs have exactly the opposite effect. If a REIT market is underpinned by appropriate legislation, REITs will have a price stabilising effect on the market." says The Chief Executive Officer of the Singapore-based Asian Public Real Estate Association (APREA — an association of listed real estate companies in the Asia Pacific), Mr Peter Mitchell.

Let us see how DLF is playing REIT game:

1.Advertising is not the only place to push your product:
We all know, we can do it on editorial pages by publishing articles promoting your cause. See for example these statements:
1. "The one financial product that Indian investors badly need and continue to be denied is a real-estate investment trust, or REIT."
: shows your concern for Indian citizens.
2. "India must decide whether we want to keep the business at home, in Mumbai or loose it to Singapore?"
: shows how patriotic an Indian you are.
3."Indian investors are kept out of the market on the pretext that the real-estate business in India is unsuitable for the small guy."
According to Oxford English Mini-Dictionary, PRETEXT n. a false reason used to justify an action.
1)Title rights aren’t clear
2)Transactions are often funded with black money
3)Valuations are suspect.
:Convince your fellow citizens to ignore these things. This shows how much you want them to prosper.
4. "If investors in Singapore can live with the market imperfections, there’s no reason why Indian investors, who are much more aware of the risks, can’t be trusted to make intelligent decisions."
: shows you value intelligence and since people working in IT are called 'knowledge workers' they like to be called 'intelligent'.
5. To put all these arguments powerfully read this article more than once.

2.DLF Assets Raising $1 Billion, May List REIT in India, Overseas

Indian real-estate billionaire Kushal Pal Singh's DLF group is raising $1 billion from investors, including Lehman Brothers Holdings Inc., and may sell shares in property trusts in the South Asian nation or overseas

3.'Our profitability has been consistent'

In a tete-a-tete with Niren Shah, the chairman of Parsvnath Developers, Pradeep Jain, lashes out at competitors including the largest real estate player DLF for showing sudden jump in revenues and profits and claims that his company has maintained consistent growth over the past many years.
But we are neither in the business of trading land, nor are we selling a finished structure leased out to somebody, to our associate company to book profits only in the books (referring to DLF). That is not operating profit or operating revenue.

So, if we say we have certain number of acres of land, we have acquired that land only after making sure that it is usable, under approved zones. We get the sale deed made, enter into an agreement and ensure an uninterrupted possession of that land with the company for urban development. We do not just draft memorandums of understanding (MOUs) without keeping ground reality in mind.

4.Meet India's Richest Real Estate Baron

DLF promoter K P Singh has emerged as the richest real estate baron after his company's initial public offering closed on June 14.

Promoters of the dozen top listed real estate developers in the country, including DLF Ltd, which will be listed next month, are worth a massive Rs 125,845 crore (or over $30 billion).

5.IPO, Land Bank and Land Valuation

6.Changes needed for Real Estate Investment Trusts to work

India will need to change parts of its legal and taxation framework for real estate investment trusts (REITs) to find a foothold in the country’s booming real estate market, according to a joint research paper by credit rating agencies, Moody’s Investors Service, and Icra Ltd.

7.Subscribe to DLF issue for the long term only: HDFC Securities

Another DLF company may hit the capital market over the next one year. DLF Group subsidiary, DLF Assets, may go public next year or get converted into Real Estate Investment Trust (REIT). It is at present awaiting SEBI`s guidelines on REITs. DE Shaw, the leading US hedge fund with over USD 30 billion in assets, has recently invested USD 400 million in DLF Assets. This could mean that the management could be seen as more investor friendly than in the past and those chances of negative surprises could be few and far between.

8.REITs - poised to gain ground

9.Realty firms plan trusts to list in Singapore

As REITs (real estate investment trusts) are yet to take shape in India, about a half a dozen realty firms have started the spadework for listing REIT-like vehicles on the Singapore Stock Exchange (SGX).

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