In recent years, India's real estate business has shown
significant expansion, underpinned by rapid economic growth,
coupled with a series of IPOs by listed real estate
companies. Changing demography, rising levels of foreign capital, a
vibrant service sector supported by the ICT (Information
and Communication Technology) and buoyant exports have
contributed to the rapid increase in India's GDP in the last few years.
The growth and expansion in the scale of operations in the
corporate sector led to an increased demand for residential and
commercial space, including modern offices, warehouses, lodging facilities
and operational infrastructure. It also boosted the housing
demand. Moreover, improved access to housing finance has propelled
the demand in the real estate sector. Over the last few years,
modern real estate development and investor interest has spread
beyond metros and large cities.
In the aforesaid context, Real Estate Investment Trusts
(REITs) play a crucial role. REITs have become a preferred public
property investment vehicle around the world. They help to reduce
capital costs. They help to improve the efficiency of real estate business
by creating conditions for building integrated property
businesses. REITs can become the investment choice for institutional
and individual investors looking to participate in real estate
business.
A REIT is an entity, where money of small investors is
brought together and then invested in immovable property, such
as shopping malls, office buildings, apartments, warehouses
and hotels, etc., and operates in conjunction with Real
Estate Investment Management Company. An REIT is typically a
real estate company that offers common shares to the public. It has
two unique features: firstly, its primary business is managing
groups of income-producing properties and secondly, it distributes most
of its profits as dividends (in the US an REIT must distribute 90%
of its annual taxable income to shareholders as dividend). Further,
a scheme floated by a REIT is permitted to acquire units in
an uncompleted building or one in the course of substantial redevelopment or refurbishment up to
the extent of 20% of the total Net Asset Value (NAV) of the scheme at the time of acquisition.
This provision gives the investor the benefit of making profits when the value of the property
escalates after it is developed.
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