Most investors tend to have a default alternate investment in the house in which they live in. Research shows that about 50% of most investors’ wealth is in their homes. However, for purposes of wealth management, the self-occupied house property is not considered as an investment asset for the following reasons:
- Investors do not earn any income in the form of rent from the house they occupy. They may instead incur expenses in upkeep and maintenance.
- Investors are unlikely to sell a house they currently occupy, unless they reinvest the same to move into a better property.
Since the scope for an income or realizable capital gain is limited in a self-occupied property, it is not considered as part of the investment portfolio.
Real estate investments may be structured as income generating or growth oriented investment. Income generating investments focus on rental income and interest income from securities. The risk in this structure is primarily from a probable default in receiving the expected income. Growth oriented investments seek to benefit from value appreciation over time. They require a longer investment horizon.
The opportunities in real estate investing have increased due to higher growth rates in development and pre-sales across several locations. Real estate investing is primarily available as private equity funds and PMS schemes, due to large fund outlay which generally corporates and HNIs can make.
However, real estate growth is aligned to economic cycles, as real estate growth has a high dependence on money supply and credit availability. Over valuation in bullish markets is a common feature, as prices rise rapidly and hence, is a big risk. Therefore, the sector tends to suffer steep corrections when the bubble bursts. Timing the investment becomes an important factor that determines the returns in real estate investments. Rental incomes are a hedge against inflation, as rentals rise with inflation.
Additional vehicles for investor participation in real estate/infrastructure investments are in the form of Real Estate Investment Trusts (REIT) and Infrastructure Investment trusts.
Real Estate Investment Trusts (REIT) are trusts registered with SEBI that invest in commercial real estate assets. The REIT will raise funds through an initial offer and subsequently through follow-on offers, rights issue and institutional placements. The price of the units on offer will be determined through a book-building process or other manner specified by SEBI. The value of the assets owned or proposed to be owned by a REIT coming out with an initial offer will not be less than Rs.500 crore and the minimum offer size to the public will not be less than Rs.250 crore if the post-issue capital of the REIT is less than Rs.1600 crore and Rs.400 crore If the post issue capital is more than Rs. 1600 crore but less than Rs.4000 crore. The minimum subscription amount in an initial offer shall be Rs. 2 lakh.
The offer will be open for subscription for a period not more than 30 days. The units will be issued only in dematerialized form and will be listed on the stock exchange. The investment by a REIT shall only be in the holding company and/or SPVs, or properties or securities or TDRs in India. Not less than 80% of the value of the REIT assets will be in complete and income generating assets and not more than 20% shall be in under-development properties, listed or unlisted debt securities, equity shares of real estate companies, government securities, mortgage backed securities and money market instruments. Not less than 51% of the revenues of the REIT excluding gains from disposal of property shall be from rental, leasing and letting of real estate and not less than 75% of the assets shall be rent generating. A full valuation of the assets shall be done each year and an updation every six months. The NAV will be declared within 15 days of such valuation/updation. Not less than 90% of the net distributable cash flows of the REIT will be distributed to the investors’ at least on a half-yearly basis.
Infrastructure Investment Trusts (InvIT) are trusts registered with SEBI that invest in the infrastructure sector. The InvIT will raise funds from the public through an initial offer of units. The offer shall be for not less than Rs.250 crores and the value of the proposed assets of the InvIT shall not be less than Rs.500 crores. The minimum offer size to the public will not be less than Rs. 250 crore if the post-issue capital of the InvIT is less than Rs.1600 crore and Rs.400 crore if the post issue capital is more than Rs. 1600 crore but less than Rs.4000 crore. The trust will have a minimum 25% public float and atleast 20 investors. The minimum subscription size will be Rs.10 lakhs. The units will be listed on a stock exchange. The investment by a REIT shall only be in the holding company and/or SPVs, or infrastructure projects or securities in India. 80% of the value of the assets will be invested in income-generating completed projects and the remaining 20% in under-construction projects and approved securities. The assets shall be valued on an annual basis and an updation every 6 months and the NAV should be declared within 15 days of the valuation/updation. 90% of the net distributable cash flows of the trust will be distributed to the investors.
Thanks for reading. We hope this was informative to you. Read Business Related more articles.
0 Comments