The one financial product that Indian investors badly need and continue to be denied is a real-estate investment trust, or REIT.
Venture-capital property funds, which are permitted by the Securities and Exchange Board of India, ask for a minimum amount of Rs2-4 crore (about $500,000-1 million) from a single investor, limiting their mass appeal. Retail investors can provide a stable source of long-term money that’s required to finance new stock of modern offices, factories, shopping malls, multiplexes and apartments.
They are being kept out of the market on the pretext that the real-estate business in India is unsuitable for the small guy: Title rights aren’t clear; transactions are often funded with black money; valuations are suspect.
This is the wrong approach. The easiest way to attack these imperfections is to remove the wedge that separates the physical market for land and buildings from the financial market that deals in securities.
Sure, there may be an initial rush among fly-by-night operators to package lousy, third-rate property into REITs and sell them to gullible small investors. That is an inevitable phase of market development. However, if India keeps waiting for lawyers and accountants to devise a perfect set of regulations that will help it bypass this period of learning and discomfort, the retail market in top-quality Indian properties will simply shift to Singapore, instead of taking root in Mumbai. And the opportunity loss for India won’t be a small one.
Rajiv Singh, vice-chairman of DLF Ltd, India’s biggest property developer by market value, told Bloomberg News last week that the Indian market can “comfortably absorb” $25-30 billion in REIT securities every year. Singh is raising $1 billion from Lehman Brothers Holdings Inc. and other investors for a fund that will be converted into one or several REITs.
“Right now, the two logical markets would be Singapore and the Middle East,” Singh said.
There is also the Alternative Investment Market in London, which last year admitted Trinity Capital Plc., a publicly traded fund that invests in Indian real estate. While Indian regulators continue to drag their feet, overseas markets are moving quickly to capitalize on the country’s rising rental yields. Rental income from top-grade commercial property can be as high as 10% of capital value in a city such as Bangalore.
Ascendas Pte, a Singapore-based property company, is using the city-state’s stock exchange to sell units in a business trust, which owns four large information-technology parks in India, including one in Bangalore.
The Ascendas India Trust will be a “REIT-like” structure, which will distribute most of its earnings, voluntarily cap its borrowings and limit its investments in projects that are still in development.
The REIT debate in India is caught in trivialities. Should the assessment of the value of properties be based on discounted cash flows or some other method? Should net asset values be disclosed once a year, or every quarter?
Perhaps the assessor should seek a legal opinion on each tenancy agreement to see if it is enforceable in a court of law. How about a due diligence on environmental clearances?
This mentality to codify the minutiae, to make no allowances for the seller’s reputation risk or the buyer’s intelligence, is a big damper. It’s also irrelevant because the real, big risks in property investments in India are outside any valuation model. The “fair value” of property in India isn’t just unknown. In the present state of the physical market, it’s unknowable.
That is what really needs to be disclosed. After that, it’s “buyer beware”. That seems to be the pragmatic approach adopted by the Monetary Authority of Singapore.
“Land title in India is uncertain and there is no assurance of clean title,” the Ascendas offer document informs us. “Title records provide for only presumptive title rather than a guaranteed title to the land.” The Ascendas prospectus also cites other deficiencies. “The lack of data with respect to the Indian real-estate market makes it relatively more difficult to assess the market value of real estate in India,” it says. “The market values of properties may, therefore, differ from the appraised values of properties.” In the same document, Cushman & Wakefield Inc., the independent assessor, says it is unable to report that the properties being valued are “free from rot, infestation or any structural defect”.
If investors in Singapore who will probably never set foot in any of these Indian properties 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. For India to hold back domestic REITs pending removal of every ambiguity for small investors is an unworkable model and a sure recipe for losing more of the business to Singapore. What’s needed is a caveat-emptor approach. Crisil Ltd, an Indian credit-rating company, forecasts investment trusts to capture $70 billion of the country’s property assets, or 5% of the total, by 2010.
India must decide if it wants to keep the business at home. At the moment, the country’s REITs appear to be more welcome overseas.
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