The Real Estate Investment Trusts (REITs) as a financial instrument has so far had a very jerky start with several incremental regulatory changes coming its way. The latest is the increase in the cap on investments by REITs in under-construction projects from the earlier 10 per cent to 20 per cent. The SEBI has proposed this relaxation in investment norms, hoping for greater retail investor participation. The other proposal by the regulator is a change in the number of sponsors and removing the restriction on the special purpose vehicles (SPVs), when the REIT’s holding company is to invest in other SPVs holding the assets.

Although this move is likely to bring in more investors to park their money in REITs, it is also likely to increase their risk in these investments. Considering the real estate regulatory authority is yet to take shape and function, it is best to be cautious when investing in real estate directly or through REITs. There are many instances where under-construction projects have not only overshot deadlines, they have remained unfinished for an uncertain period of time, which could hit investors sharply.

Investments in REITs in case of such projects hamper the ROI, which will have a trigger effect on not just the project cost escalation but also delayed occupancy by tenants, resulting in delayed realisation of rents. Yes, there are merits in investing in under-construction projects launched by well-known developers, but it is not fool proof.

The move brings cheer to the commercial real estate segment, where there is still a lot of investment opportunity, especially in the list of cities tagged under the Smart City project. For real estate developers who are otherwise cash strapped and looking for different ways of funding, not only will this provide them with significant investments, it will also act as a check on their construction schedule and completion of the project. Investments in select real estate stocks can be beneficial, as stock prices in companies where REITs have investments will help the margins of the companies.

olmdesk@outlookindia.com