What the Indian real estate market lacks and what needs to be done to develop a mature real estate market capable of sustaining a structure such as REITs.

1. REALISM.IN PUBLICATIONS | Spring 2011
THE NEW ‘ISM’ IN INDIAN REAL ESTATE
Is India Ready for REITS?
What the Indian real estate market lacks and what needs to be done to develop a mature real
estate market capable of sustaining a structure such as REITs.
As straightforward as the followed a set of rules and
question may seem, the answer regulations. One of the main
is not a direct “yes” or “no.” regulations is the distribution of
Rather, it requires a careful 90% of their income to their
consideration of the
characteristics of the Indian real
investors as dividends. This
created a pass-through entity
“The talk of
estate industry, what it lacks that investors benefited from as launching REITs in
and what needs to be done to they received a consistent India in a structure
develop a mature real estate income flow, unlike stocks, similar to what exists
market capable of sustaining a which may or may not pay in the United States
structure such as REITs. dividends. has been going on for
many years. What
REITs are a unique blend of Like stocks, however, REITs are should be realized,
Main Street and Wall Street. part of the overall capital however, is that many
They are securitized real estate markets/Wall Street. REITs aspects of real estate
vehicles, in which a group of thus invest the pool of money in India must be
investors pool money to buy sourced from their investors— addressed before one
assets, mainly income- the Wall Street part—into real
could even think of
producing real estate. REITs estate markets, linking them
introducing such a
were created to help the retail— with Main Street as well. It is
product to the
vs. institutional—investors important to emphasize the
participate in the broader real dual nature of REITs since the investment
estate market indirectly. existence of a mature capital community “
market is as important as the
Because real estate as an asset existence of a mature real estate
class is a capital-intensive market. The absence of one of
investment, many retail these elements makes it
investors had not been able to impossible for a REIT market to
include it in their investment function.
portfolios before the creation of
REITs. To encourage retail The talk of launching REITs in
investors to invest in this asset India in a structure similar to
class, REITs were created in the what exists in the United States
United States as part of special has been going on for many
legislation that allowed them to years. What should be realized,
be incorporated as companies however, is that many aspects
without being taxed at the of real estate in India must be
corporate level, provided they addressed before one could
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2. even think of introducing such a
Institutional grade space:
product to the investment Except for office space (some can be
 Different property type
community. The dual nature of classified as grade A), organized real
REITs
REITs emphasizes their estate space markets for other
 Focus on a type of
dependence on the real estate property types such healthcare, retail,
property due to
asset/physical space market. storage, industrial, apartments and
specialized level of
Without an organized real specialty do not exist (in the form of
management skills across
estate market, REITs can’t income producing properties)
property types
deploy the funds they raise. The
model above shows the various
components of an efficient REIT
market and what India is
1. Currently no model exists
lacking. Valuation models
2. No requirements to be an appraiser
 Audit and sale purposes 3. No specialized personnel exist
The model shows the absence of
various aspects of real estate in
India that would be required for
the efficient functioning of
1. Non-uniform state taxes
REITs in India. The absence of
2. Title issues with land
even one of these elements Legal structure
3. Stamp duty on every sale and
could lead to an inefficient REIT  Backbone of real estate
purchase which can affect IRR of the
market and trigger a collapse in
REIT
the entire system. Rather than a
failed attempt, it would be wise
to build up each of the elements
over time before initiating any RE trained employee base 1.No RE trained personnel
discussion of REITs in India. A  REITs require asset and
2.No RE education at the corporate or
failed attempt would be a portfolio management
university level
detriment to the globalization of 3.RE is still not looked at as a career
expertise
REITs and discourage any option
 Also development and
foreign REIT, such as a U.S. 4.Low perceived image (associated
leasing expertise
REIT, from launching in India only with brokerage)
in the future.
“Without an
organized real estate
market, REITs can’t
deploy the funds they
raise. The model shows
the various components
of an efficient REIT
market and what India
is lacking.
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3. About realism.INTM: Author:
realism.IN™ is a partnership of young entrepreneurs
from India and the United States striving to provide Vivek Sah, Ph.D., provides strategic insights to
high quality knowledge backbone to the real estate realism.IN in addition to heading one of its core
business in India. The executive team of realism.IN™ is wings. Vivek is a Professor at the Burnham-Moores
made of the products from IIT, NIT and BIT. Our Center of Real Estate, University of San Diego. He
teaches courses in Real Estate Finance and Real
products and services are prepared and delivered by a
Estate Investments. Prior to his current position, he
strong group of professionals and researchers focused was involved in real estate consulting in India with
on Indian real estate. In addition, we leverage on our ICICI, where he worked on various real estate
strong professional and academic network of external ventures across India. He also provided real estate
experts to deliver what our clients need. Our core research on Indian property markets. His current
competencies include real estate, land development, areas of research include REITs, commercial real
estate and housing markets. His research has been
finance, banking, investment, marketing, branding,
published in leading real estate journals in the U.S
strategy, statistical modeling, econometrics,
and U.K. He is also quoted on matters about real
Information Technology and architectural design. estate in the local media.
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The new ‘ism’ in Indian real estate
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Reproduced from India China America Institute’s ChindiaBiz OpEd Series.
THE NEW ‘ISM’ IN INDIAN REAL ESTATE
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