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Investing in Real Estate in India : New Opportunities in REITs and Crowdfunding
Across much of the developed world, REITs are viewed as tried and tested financial instruments which generate safe returns. The growth of the global REIT industry – from $300 billion in 2003 to over $1 trillion in 2013 – is testament to its huge potential in India. Analystsestimate that India's REIT market will soar to $20 billion by 2020.
Aside from REITs, however, another kind of real estate investment is gaining traction at an incredible pace—and is already available in India to both residents and non-residents. Crowd-investingenables individuals to purchase real estate, typically in a housing development, at a deep discount in the early stages of the project and then to exit the investment profitability 12 to 36 months later. In addition to offering flexibility to the investor, the property crowdfunding model presents a flexible source of capital to developers.
Crowd-investing and REITs both offer the attraction of a low entry barrier—as little as a few lakhs— enabling investors to engage in real estate transactions at a fraction of what a fully owned property would cost. What, then, are the differences between these investment routes? Described below are key distinctions of each.
Yields:Government stipulations in India will limit 80% of each REIT to commercial properties. A recent article in Forbes pointed out that the rate of returns for Indian commercial projects averages a mere 8-9%,roughly the same as bank deposits. After figuring in property appreciation, the expected annual yield of a REIT would be approximately 12-13%. By contrast, crowd-investing offers much higher yields, generally in the neighborhood of 20%. The typical crowdfunded investment takes place in the early stages of a residential project, which means that investors get a sizeable upfront discount and thus lock in a significant portion of the future returns at the time of purchase. These early-won gains are then compounded by property appreciation, which can be substantial when the project in is a high-growth residential area of a booming city such as Bangalore.
Ease of entry and exit: Since they will be listed on the securities market, REITs will be able to be purchased or sold easily. Crowdfunded investments offer less liquidity , as there is a short lock-in period of around 2 years between the point when the project is launched and when the price appreciates to a level in which resale is attractive. Exiting a crowdfunded investment involves reselling the property, which in most cases in handled conveniently by the investment firm itself.
Tangibility of investment: With a REIT, an investor buys shares in a pool of properties. Since allocations are made by the fund manager, the investor has no control over how his capital is utilized. The crowd investor, however, is essentially buying into a particular unit in a specific project. He or she therefore has the option of investing into the property of his choice in a location that he desires.
Risk:Because REITs invest most of their capital in rented commercial property, the primary risk is that of vacancy and lack of rent appreciation. These can depress returns in time of excess commercial property inventory. In the case of crowd-investing, the risk is similar to that of purchasing a property at a pre-launch stage. Reputable crowd-investing services mitigate risk through intensive due diligence. Vikram Chari, who heads the Indian real estate investment portal SmartOwner, describes his company’s exhaustive methods: “Our experienced team partners with leading real estate law firms to evaluate potential sites. Only those projects that meet our commercial, legal and project diligence are offered to our clients.”
Taxes: The Indian government has promised certain tax breaks to REIT investors, but many in the industry feel these are insufficient. There are concerns over taxes on the direct transfer of assets to REITs as well as the securities transaction tax. Adding to the cost burden will be stamp duties and registration fees, all of which will serve to cut into the investor’s returns. Profits from crowd-invested properties are taxable as well, but the higher returns help make the taxes affordable. Also, since the crowd-investor typically exits a project before the registration phase, the stamp duties and registration costs are not relevant; these costs are instead borne by the final buyer.
In summary, crowd-investing and REITs both present safe, convenient, and flexible options for taking part in the real estate market. While REITs will have greater liquidity, crowd-investing offers the prospect of significantly greater returns; this is due primarily to the discount at the time of purchase and the appreciation during the development phase. In India’s high-growth centers such as Bangalore, crowd-investing can be particularly lucrative. Either way, investors are well advised to explore these options to profit from India’s growth in the coming years.