The Budget announcement on the potential introduction of real estate investment trusts (REITs) as an alternative investment class has evoked a heightened sense of activity across many quarters. Whilst the general consensus evinced by market experts and industry players is that there still remains a considerable amount of changes that are required in the “financial infrastructure” in order to accommodate REITs, it is undoubtedly a product that has already captured the imagination of local investors, despite its introduction in global markets several decades ago.
The technical aspects of REITs were covered in exhaustive detail in an article by Entrust Wealth Management and Entrust Capital Markets CEO Naushervan Beg published in a leading business newspaper less than a month ago and to do so again would make it somewhat redundant. However, suffice to say that REITs encapsulate several key elements that other products that generate a regular income stream, such as debentures, simply do not.
A key feature of REITs is that it represents a tangible and identifiable asset group and the investment returns would largely hinge on the underlying performance of the real estate portfolio that constitute the REIT. Therefore, whilst traditional debt products would largely depend on the overall performance of the issuer, and their performances are inextricably entwined with one another (company and the product), the REIT could be evaluated on its own merits, notwithstanding the performance of the issuing entity.
Furthermore, the REIT provides the regular income flow that investors in debt instruments aspire for, whilst also offering the potential for capital gain, if the underlying real estate portfolio increases in value.
REITs also act as viable conduit to channel medium to long-term equity/participation type capital into the real estate sector via the capital markets, which would be more stable than the traditional reliance on short-term loans or other similar debt-based borrowings. Existing real estate owners could also transfer their real estate land banks into a REIT structure, thereby freeing the liquidity to pursue their core business activities. For instance, even financial institutions (FIs) that own large extents of real estate as part of their investment portfolio could realise the cash equivalent without actually foregoing ownership since REITs can be structured for a limited time period if required and ownership would transfer back to the original owners (FIs) on maturity of the REIT.
There are other inherent features that further enhance the lustre of the REIT. There is undoubtedly a higher degree of transparency, especially in the case of listed REITs, a factor that is becoming increasingly important in the decision-making of investors. The real estate sector would also no longer be the exclusive domain of the HNWI and institutional investor, with small-time investors also being able to participate in an asset class whose ‘beta’ would provide the much required diversification that an investment portfolio yearns for. This has been an espoused objective of successive governments, where the interests of the smaller investor have been a pivotal factor in the policymaking development of the markets, as a whole.
One should also not ignore a particular idiosyncrasy of the Sri Lankan market where real estate is the traditional “go to” investment for those with the financial wherewithal. Whilst equities, debentures et al could either be embraced or shunned, depending on individual risk appetites, real estate is a more vanilla-type of investment and does not have the intricacies associated with more complex investment products.
It is particular noteworthy that the Budget recommends a complete waiver of stamp duty for REITs, provided certain criteria are satisfied. The subject of REITs, in the aftermath of the Budget, will be the topic of a discussion where market experts would deliberate on at a presentation and panel discussion titled ‘Creating the Real Estate Infrastructure to spur Economic Growth’ to be held on December 11, 2016. More details could be obtained via email [email protected] or call 0775837575.