REITs - Real Estate Investment Trusts - All you wanted to know about !!!

The first Budget by the new Government  has brought real estate investment trusts (REIT) back into the limelight. Hailed as a ‘game changer’ for the Indian property market, REITs is an idea that has been making its rounds since 2008 when SEBI first mooted them.

What are REITs ?

• REITs or Real Estate Investment Trusts are a special type of investment vehicle which operate more like mutual funds but invest in real estate properties for returns. 
• These properties are usually income generating properties, commercial or residential, and the returns from such investments are passed on to the investors in the REITs. 
• Usually REITs' units, issued by fund houses, are traded on the bourses and investors can buy and sell those units like stocks. 
• In several of the developed markets, REITs are one of the most liquid investment products for investing in the real estate sector even with a relatively low sum of money than the investor would have if he/she had to invest directly in real estate. 
• The various types of REITs include equity, mortgage and hybrid ones. 

Property held by REITs may also be sold and reinvested in other assets. Any gains can go to unit holders. A principal valuer will asses the property value every six months, and once a year by two independent valuers.

In fact, REITs have been in existence for as long as two decades in countries such as the US, the UK and Singapore.

Evolution of REITs in India ?

How REITs will be a game-changer for Indian real estate

REITs will establish a new asset class, and being a quasi debt-equity instrument, be attractive for risk-averse investors get the twin benefits of yield as well as capital appreciation. For developers, it would improve property market transparency, smoothen volatile property cycles, and potentially lower the cost of capital.

The Securities and Exchange Board of India (Sebi) recently announced guidelines for the creation of real estate investment trusts (REITs) in India.  Just as mutual funds do with equity and debt, REITs will pool money from investors and invest them in income-generating (rental assets) offering them a way to diversify their portfolios by investing in property. After collecting money, REITs will issue units to investors, which will then be listed on exchange for buying and selling. This will help establish a new asset class, and being a quasi debt-equity instrument, be attractive for risk-averse investors get the twin benefits of yield as well as capital appreciation, an ICICI Securities report says. For developers, it would “improve property market transparency, smoothen volatile property cycles, and potentially lower the cost of capital.”

How will it help different stakeholders ?

Will Reits bring a respite to real estate sector?

• Reits have been on the wishlist of the Indian real estate sector for long. They are expected to bring in globally-accepted practices to real estate funding and revive the interest of both global and domestic investors in the sector.
• Reits will bring the much needed respite to the commercial real estate sector and enable developers sitting on assets to both unlock value and create liquidity. Globally, Reits are an accepted investment avenue.
• Reits use investors' money to buy real estate assets for rental and capital gains. These help buyers benefit from real estate price appreciation without the hassles associated with buying and maintaining properties. As Reits invest a large pool of money in multiple properties, the investment risk is also diversified.
• Allowing Reits will be a sign of the maturity of the Indian real estate market. Reits reduce individual speculation in real estate assets and allow for more professional investment and management in the sector
• If implemented, the timing of Reits will be great as many developers are faced with liquidity issues as they have large amounts of capital locked in commercial assets and are finding it difficult to sell due to the large ticket sizes.
• Investments by Reits will also indirectly reduce the exposure of banks to risky assets as they have provided construction finances to many projects

   

The proposed structure

Each Reit will have a manager, sponsor and trustee. It will have a five-member investment panel.  

Eligibility criteria for sponsors, managers

• Enough to keep non-serious players away, but seem loose change for big realty companies such as DLF. The manager should have a net worth Rs 5 crore, the sponsor Rs 20 crore. 
• The manager is required to have five years’ experience in fund management/ advisory services/property management in the real estate sector.

Case Studies 

Harnessing the East African Market !

The realisation of a large regional economic bloc with a combined population of more than 141.1 million people, land area of 1.82 million sq.km and a combined Gross Domestic Product of $99.8 billion, bears great strategic and geopolitical significance and prospects of a renewed and reinvigorated East African Community (EAC).

East African Community (EAC)

• The East African Community (EAC) is a regional intergovernmental organisation of the Republics of Burundi, Kenya, Rwanda, Uganda and the United Republic of Tanzania, with its headquarters in Arusha, Tanzania.
• The Treaty for Establishment of the East African Community was signed on November 30, 1999 and entered into force on July 7, 2000 following its ratification by the original three Partner States – Kenya, Tanzania and Uganda. 
• The Republic of Rwanda and the Republic of Burundi acceded to the EAC Treaty on June 18, 2007 and became full Members of the Community with effect from July 1, 2007.

Aims

• The EAC aims at deepening economic, social and political integration and enhance the region’s competitiveness through enhanced value chain, trade and investments. 
• To achieve such goals, the EAC countries established a Customs Union in 2005 and a Common Market in 2010 which provides “four Freedoms” namely, free movement of goods, labour, services and capital, to significantly boost trade and investments and make the region more productive and prosperous.

EAC Partner States also qualify for duty-free access to the US market under the African Growth and Opportunity Act (AGOA), as well as European Union (EU), and the Common market of Eastern & Southern Africa (COMESA).

• Reforms and a growing participation in global trade has helped the EAC region to grow. 
• It has been the second fastest growing economic bloc in the world in recent years with an average growth of 5.8% in 2012 (behind ASEAN at 6.1%) which is the best rate of growth in the Sub-Saharan Africa region. 
• Tanzania, Uganda and Rwanda showed a robust annual growth of over 7% from 2002 to 2012, and the total FDI inflow in the EAC region has almost tripled from $1.3 billion in 2005 to $3.8 billion in 2012.

All countries in the EAC region have recognised the private sector as an essential growth engine for economic and social development and have introduced favourable policies to attract domestic and foreign investment. Governments are encouraging investment by providing fiscal incentives, establishing Export Processing Zones (EPZs) and industrial parks, setting up exports and investment promotion agencies (IPAs), and doing outreach activities.

• Foreign investors receive National treatment and generous incentives especially when their investment and business plans lead to foreign exchange generation, technology transfer, job creation, and skill enhancement in national development priority areas such as value‐added agro‐processing, manufacturing, tourism and infrastructure.

The EAC region is projected to continue showing a strong macro‐economic performance in coming years. According to the World Bank, Rwanda’s economy is projected to grow by 7.5% in 2015, Tanzania 6.8%, Uganda 6.2%, Kenya 4.9% and Burundi by 4.3%. The population in the region is forecast to grow to 150 million by 2015 and to 237 million by 2030. The EAC is expected to expand its membership to South Sudan and possibly the Democratic Republic of Congo in the near future as well.

Intra-EAC Trade

The intra-regional trade among EAC is growing rapidly, doubling from $1.6 billion (7.8% of total east Africa’s trade) in 2006 to $3.8 billion in 2010 (11.4%). The share of intra-EAC exports to total east Africa’s exports has also increased from 14% in 2006 to over 20% in 2010, while the share of intra-EAC imports in total east Africa’s imports remains small at around 5%.

• Kenya, Uganda and Tanzania are the main intra‐regional exporters. 
• Kenya has played a dominant role in the intra¬‐regional trade, exporting manufactured goods, chemicals and machinery to the landlocked countries such as Uganda and Rwanda. 
• Major EAC exports within the region comprise manufactured products (food products, beverage, tobacco, cement) and oil re‐exports, while EAC exports to other regions mainly consist of commodities.

The fast‐growing intra‐regional trade in manufactured goods implies potential growth in manufacturing in the region backed up by the regional demand. Regional trade in manufactured goods (plastics, chemicals, paints, and cosmetics, construction materials and pharmaceuticals) and regional production chains can generate jobs and increase GDP of the region.

EAC’s Trade with the World

• The EAC region borders with eight countries including Ethiopia, Somalia, Sudan, South Sudan, Mozambique, Democratic Republic of Congo, Zambia and Malawi, of which five are landlocked. This central location of the EAC region presents significant market potential in largely untapped markets, not only in East Africa but also in Central and Southern Africa.

• EAC’s trade with the world increased over five-fold from $8.9 billion in 2002 to $49.3 billion in 2012. Exports of the EAC have increased to $13.8 billion in 2012, up from $2.8 billion in 2002, while imports have also witnessed almost six-fold increase to $35.4 billion in 2012, compared to $6.1 billion in 2002.

• The region’s major exports are agricultural products such as tea, coffee, flowers, fish, tobacco, and cashews, which account for 36% of the region’s total exports. 

• Major imports include petroleum and related products, vehicles and transport equipment, machinery, and pharmaceutical products. The relatively small share of intra¬‐regional imports to total EAC imports shows that manufacturing in the region has remained under developed even while the demand is growing.

• EU is the region’s biggest trading partner, accounting for nearly a quarter of the region’s total imports followed by India, UAE, China, South Africa, and Japan. Coffee, cut flowers, tea, tobacco, fish and vegetables dominate exports to the EU from EAC.

• Machinery and mechanical appliances, equipment and parts, vehicles and pharmaceutical products dominate imports from the EU into the region. 

• COMESA and South African Development Community (SADC) are among the region’s other important export destinations.

• While, SADC accounts for a major share of EAC imports, which is mainly due to imports from South Africa, imports from the rest of world are mainly from the Middle East and Asia, including India and China.

India and EAC relations

• Helped by a vibrant business and commercial relationship driven by the presence of a large Indian community in EAC, India has become a leading trading and investment partner of EAC. India is an important source of essential machinery, pharmaceutical products, mineral fuels, motor vehicles (including auto parts), textiles, iron & steel and rubber products.

• Exports from EAC to India mainly consist of hides & skins, leather, metal ores & metal scrap, cashew nuts, coffee, gem stones and gold. EAC countries have opened their doors to both public and private sectors of India for investments and expansion of industrial base. Sectors identified are agri-processing, power, IT, transportation, telecommunication, food processing, and commercial farming.

• EAC provides good opportunities to Indian service providers as well. The main areas for rendering services are in education, consultancy and healthcare services. India has been an important destination for higher education for the students of EAC under the Indian Technical & Economic Cooperation Program (ITEC).

• There is great demand for consultancy services in the EAC as all countries in the region are witnessing economic development initiatives at various levels. The sectors which show maximum potential for consultancy services are infrastructure, energy, IT enabled services, agriculture, rural development and hotel management.

• Bilateral trade between India and the EAC has risen 13-fold, from $490.8 million in 2002 to $6.6 billion in 2012. India’s exports to the EAC countries have risen significantly, by 16-fold from $369.3 million in 2002 to around $5.9 billion in 2012. As a result, the share of the EAC countries in India’s total exports to Africa has risen from 12.2% in 2002 to a healthy 21.7% in 2012. India’s imports from the EAC region have also risen over 5-fold from $121.5 million in 2002 to $624.1 million in 2012, accounting for 1.5% of India’s total imports from Africa.

• Potential items for India’s exports to the EAC region include petroleum products, machinery and instruments, electrical and electronic equipment, vehicles other than railway, cereals, animal, vegetable fats and oils, iron & steel, and plastics. 

• Potential sectors for India’s investment in the region include agriculture, horticulture, manufacturing, construction, energy, banking and other financial services, information and communication technology (ICT) and tourism.

The Broad Strategy

The broad strategy to enhance India’s commercial relations with the EAC region could include cooperation in key sectors such as transport related infrastructure; meeting power and energy requirements of EAC; financial/ banking sector development; agriculture and food security; capacity building, technology transfer and human resource development; ICT and knowledge sharing; environment and natural resources development and management; industry and micro, small and medium enterprises (MSME) development; hospitality industry; multilateral funded projects; and in developing linkages with trade promotion institutions, investment promotion agencies, chambers of commerce.

• However, it is essential that India and EAC should undertake supply and demand surveys, organise buyers and sellers meetings and other multi-country contact promotion events to identify and exploit the potential of intra-Common Market trade.

It is high time for India to turn its attention to EAC as an investment location because of 

1.     growing political stability, 

2.     commitment to provide liberal foreign-exchange regime, 

3.     availability of cheap labour, 

4.     agro-fertile land for agricultural research & food processing 

5.     social development in the region. 

In addition, there is a need to assert EAC and India as building block to realise the Pan Afro-Asia vision through a Common Union.

India should also observe the strategic areas of great economic importance of EAC member states like trade liberalisation, custom cooperation, trade related issues, industry and energy, monetary affairs, agriculture, economic and social development.

Ethiopia - A Frontier market that India can exploit !!

What is a Frontier Market ?

• A frontier market is a type of developed country which is more developed than the least developed countries, but too small to be generally considered an emerging market. 
• The term is an economic term which was coined by International Finance Corporation’s Farida Khambata in 1992. 
• The term is commonly used to describe the equity markets of the smaller and less accessible, but still "investable", countries of the developing world. 
• The frontier, or pre-emerging equity markets are typically pursued by investors seeking high, long-run return potential as well as low correlations with other markets.
• Some frontier market countries were emerging markets in the past, but have regressed to frontier status.

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"We promise to give an investment license to a global company within 24 hours.” This bold promise was made at an unusual road show was held across three cities in India earlier in December. The road show was held by a country keen to attract investment from Indian companies. This country is among the top ten fastest growing economies of the world and is on track for achieving millennium development goals in health and education. The country also boasts of being a gateway for a combined market of 400 million consumers. 

Roadshows are common in India, but this one was by Ethiopia and highly unusual as African countries have rarely made such promises to Indian companies. The apex chambers of commerce in India have supported several initiatives to bring African markets closer to Indian Inc. But this road show was perhaps the first of its kind driven by a single African country. 

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• Ethiopia is growing rapidly towards middle income status. 
• It has the ability and ambition of seeking global investment with pride and confidence. 
• Ethiopia floated a global bond to raise more than $1 billion of external capital. 
• The bond issue was oversubscribed two times when it closed in the first week of December. 
• The country is being recognized by global investors as a high growth frontier market. 
• Only 30 years ago, the Band Aid concert had been held to raise aid for the country. Today it stands tall among emerging and frontier economies. 

Among all countries that have issued international bonds, Ethiopia is the poorest with the lowest per capital income. But this status may not stay for long. 

• The funds raised will be used for railway, power and agriculture projects. 
• Ethiopian GDP grew at 8.25 per cent this year according to International Monetary Fund. 
• Prime Minister Hailemariam Desalegn says that Ethiopia welcomes global investment not mere aid. 
• Ethiopia needs over $50 billion investment over next five years. 
• Out of this about $15 billion will come in from global investors. 
• Ethiopia received FDI worth almost $1 billion in 2014, maintaining consistent growth in inflows. 

Things India can learn from Ethiopia and oppurtunities for India ?

India has been present in Ethiopia for years but needs to increase its investment in the country. More than 600 Indian companies operate in Ethiopia but now the country is demanding focused attention from specific segments. 

• In many ways Ethiopia appears to be ahead of India is providing an enabling environment for industry. 
• Apart from giving an investment license in 24 hours, Ethiopian government is almost corruption free and offers single window approvals. 
• A few Indian companies that already operate in Ethiopia proudly proclaimed that it was easier to do deal with government departments in Addis Ababa than in New Delhi. 
• This is borne out by the World Bank’s ease of doing business report where Ethiopia ranks higher than India on some parameters. 

There are challenges of logistics and inadequate infrastructure. But these are challenges that Indians can overcome faster than other investors. 

• India and Ethiopia are only a single flight away. The daily flights from Mumbai and New Delhi ensure that connectivity does not pose a problem as it does for many other countries. There is a historical connect too. 
• As Abyssinians, Ethiopians came to India’s western region as early as 4th century. 
• From being slaves, they grew into much admired and sought after warriors in regional kingdoms. 
• Soon they rose in the ranks to become chieftains and even rulers of principalities in Gujarat and Maharashtra and merging with local communities. 

Many decades ago Indian teachers were sent to Ethiopia by the government to teach in schools. Many generations of Ethiopians have grown with deep regard and appreciation for India. 

Unlike India and unlike the entire African continent, Ethiopia was never colonized. It remained free of imperial powers. But like India, it nurtures vibrant culture, cuisine and commerce. In these times of globalisation, it is natural that these two emerging economies will strengthen their trade and investment links.

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And what are the exact opportunities?

• In the case of refined petroleum, India caters to only 1% of Ethiopia’s demand, and in the absence of supply woes, policy hurdles and latent demand, our exports of this product can be raised by over 95 times.

• There was recently much talk about how India missed out on strong wheat prices caused by crisis in Ukraine, drought in some US wheat-producing regions, season delays in Canada (due to a longer-than-normal cold season) and lower Australian produce due to the El Nino. It could have been missing out on much action in Ethiopia too! India is a country that already has excess of this crop in its coffers. India’s current wheat crop, is currently being harvested, and expectations are that the total output will reach the highest ever for a single season – 96 million tonne. Add that to the 38 million tonne that is already stored away by the government, and there is no reason to believe why exporters from India should miss the opportunity of increasing their wheat supply to Ethiopia by anywhere up to 33 times. (At present, India caters to only under 3% of Ethiopia’s import demand for the cereal crop.)

• The world hasn’t missed a blink in discussing how the great Indian auto road show is now losing steam. Especially in the passenger cars and commercial vehicles categories. What are we blaming? The EU crisis? Slowdown in the Americas? Elections in Australia? Stop blaming the PIGS, and start counting how many buses and cars domestic and multinational auto companies from India fell short of when it came to supplying automobiles. In 2012, India supplied 1.44% of cars, 3.68% of buses, and a paltry 0.74% of delivery trucks imported by Ethiopia. Is there scope to make more money from exports to Ethiopia? [Are you waiting for an answer?]

• Isn’t it surprising that India (which has so many domestic cellphone producers) exports only 0.07% of telephones imported by Ethiopia. With a strong manufacturing base, where it exports about $1.5 billion worth of aircraft parts to the world, it doesn’t pay attention to the $90 million plus demand in Ethiopia. Packaged and unpackaged medicaments and medical instruments, large construction vehicles, stone processing machines, and even gas turbines (of which India supplies nothing – some opportunity there!) – count the products and their count keeps on rising, there are reasons aplenty for Indian exporters to bet bigger on the Ethiopian market in the days to come.

• For exporters looking at longer term and a bigger picture, investing in Ethiopia could also be an option. For Ethiopia to be able to integrate and assimilate foreign investment into its economy, the levels of technology and capital intensiveness should be appropriate for a developing economy. India’s long experience in developing appropriate technology and in the promotion of small industries could be used by Ethiopia, keeping the above objective in mind. Opportunities for foreign investment in Ethiopia abound in the areas of mineral extraction, agro based industries and light manufacturing. Indian businesses can invest either individually or as a consortium in areas like infrastructure development and mineral extraction. Smaller units can be set up to tap opportunities in areas like leather & leather manufactures and food processing.