REITs Right for India? Analysis of REIT Structure and Performance

2011
REITS- Right for INDIA?
Submitted By: Dhara Badiani KHR2009PGDMF012 PGDM Finance 2009-11
Submitted To: Prof. Bharat Shah
Dhara Badiani Capstone Project Submission 2/26/2011
REITS- Right for INDIA? 2011

CONTENTS
Acknowledgement Executive Summary 1.0 1.1 1.2 1.3 1.4 1.5 2.0 2.1 2.2 2.3 2.4 2.5 3.0 3.1 4.0 5.0 5.1 5.2 6.0 7.0 Introduction REIT Concept Literature Review Choices Available for REIT Investors Advanatges and Disadvantages to REIT investors Methodology Comparison of Features of REF, REMF, REIT SEBI Guidelines for REMFs REIT Structure of Different Countries Performance of REITs in Different Countries Draft Guidelines on REIT by SEBI How REIT and REMF complement each other Readiness of India for REITs/REMFs Hurdles in the Introduction of REIT/REMF in India Study of Time Variation of Systematic Risk of REITs in USA Singapore BTs- Pseudo REITs Indian Properties based BTs in Singapore Overview of Proposed BT of DLF Conclusions Recommendations Bibliography Appendix Page 3 Page 4 Page 6 Page 8 Page 11 Page 13 Page 14 Page 15 Page 17 Page 19 Page 20 Page 23 Page 33 Page 33 Page 34 Page 24 Page 40 Page 43 Page 43 Page 46 Page 51 Page 52 Page 54 Page 56
2|Page
ACKNOWLEDGEMENT
I owe a great many thanks to a great many people who helped and supported me during the writing of this report. My deepest gratitude to Professor Bharat Shah, the Guide of the project for guiding and correcting various documents of mine with attention and care. He has taken pain to go through the project and make necessary correction as and when needed. I would also thank my Institution and my faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my parents and well wishers.
3|Page

Executive Summary
The real estate companies are involved in construction projects with long gestation periods. Funding such projects (residential, commercial, retail, hotel etc.) is a mammoth task in itself. These projects may be part of the development business or the annuity business of the real estate firm. Unlike development business, in the annuity business the construction is not sold out but rented, providing regular stream of cash. For projects forming part of
development business, the advance payments received from clients at different stages of completion is a source of fund for real estate companies. However, rental properties of annuity business only reap benefits once construction is over and rent start to pour in. As it is well known that India is the second fastest growing economy after China and such an economy is in dire need of residential, commercial, retail, hotel, hospital space etc. REITS, fundamentally, acquire constructed real estate properties and thereafter draw
rental income from real estate properties thereby facilitating the annuity business of their sponsor.
At the moment India does not have official guidelines on REITs (draft SEBI Guidelines of 2007 not made formal until now). Other avenues of investment in real estate include Real Estate Funds (REF) as well as Real Estate Mutual Funds (REMF). These funds are not exactly meant for catering the same risk class of investors as REIT. REIT is meant for retail investors not in a position to invest directly into the illiquid real estate assets. Moreover, REIT stock/units are behaving lesser as general stock and more as real estate assets with the passage of time. This is shown by studying the time variation of systematic risk (beta) of REIT.
Currently REITs are operating in more than a dozen countries with slight variations in the REIT framework. There are several hurdles in the introduction of REITs in India. Real estate in India is a largely unorganized sector with small local players dominating the scene. Lack of clear land titles, high stamp duties and absence of regulatory authority for real estate are some of the factors acting as deterrents for REIT.
4|Page

Under the prevailing conditions in India, Indian real estate firms such as Indiabulls Real Estate Ltd and now DLF Ltd are setting up listed Business Trusts in Singapore, which are not exactly REITs but voluntarily adopted features similar to them. Another international real estate firm, Ascendas, has an Indian property based business trust listed in Singapore. As a result all the profit earned from the underlying income earning properties of the trusts is repatriated to Singapore and the Indian retail investors are not enjoying the fruits of the organised income bearing real estate properties in India.
1.0 Introduction:
5|Page

The Real Estate Industry in India is passing through difficult times. The woes of the Real Estate industry are multifarious. Global recession which took root in 2007 has shown that the real estate market globally as well as in the Indian scenario is quite vulnerable. The real estate companies finance their projects from loans from banks, Private Equity players, IPO route, sale of Treasury stocks, advances and installment payments from real estate buyers. About three years ago, the governments easy money policy led to developers embarking on an unprecedented expansion spree. Unfortunately, the onset of the economic slowdown butchered sales (60% fall in demand from May 2008 to November 2008) as buyers stayed away and banks became averse to lending. The IPO route became unfeasible as was demonstrated by the cancellation of the Emaar MGF IPO in February 2008 due to falling stock market. Private Equity players became inactive and sales of Treasury stocks become unviable. Hence, several real estate companies began defaulting on Debt Mutual Funds payments and bank loans. As part of the austerity measures real estate companies have been forced to cut their debts drastically as banks have become extremely cautious and are lending on a very selective basis. Since, real estate companies are not banks favorite borrower; the builders have to rely on other sources of finance.
With the revival of the stock market in 2010 an increased corporatisation of the real estate companies is on the cards. As many as 10 companies including Emaar MGF Land, Lodha Developers, Sahara Prime City and Ambience have obtained permission to raise 15000 crore from the primary market.
Developers have also been successful in raising equity through the qualified institutional placement (QIP) route. Companies that have raised money through the QIP route include Unitech Ltd (US$325 million), Indiabulls Real Estate Ltd (US$550 million), Housing
Development and Infrastructure Ltd, Sobha Developers Ltd and Orbit Corp. Ltd. Institutional investors have asked the real estate companies to first repay their high interest debts and afterwards take on new projects in order to achieve the goal of debt reduction.
6|Page

For commercial projects, developers are financing new projects by rent/lease discounting agreements with banks. Under a lease or rent discounting agreement, banks lend to
developers for new projects against rents they directly realise for completed projects, which also is mortgaged with the bank. Thus, banks are assured of guaranteed cash flows and also have physical assets in case of defaults. However, this source is only for those developers which have one or more completed projects on lease such as DLF Ltd.
During recession in 2008-09, developers could not source adequate finance for their commercial projects and had to shift from commercial projects to middle income housing projects. Developers had shifted their focus from commercial, retail and hospitality projects to residential sales during the slowdown. DLF and Unitech led the way, saying they would concentrate on mid-income homes, and suspended other projects. The reason for shifting focus was because residential projects are financed by advances from buyers while commercial projects are mostly financed through internal accruals and banks. By launching housing schemes, the developers could raise finance for sustaining their existing operations (projects under construction).
Real Estate Investment Trusts (REITs) can provide cash strapped real estate companies in India with a big window for mobilising funds especially for commercial projects such as retail, office, hospitality and healthcare. Although REITs have been prevalent in other countries like USA, UK, Australia, Singapore etc. for many years the same has not happened in India. To answer this perplexing issue it is imperative to examine the various facets of REITs i.e. the structure/anatomy of REITs, the various models being followed in different countries,
hurdles of bringing REITs/Real Estate Mutual Funds (REMFs) how companies (Indiabulls, Ascendas, DLF) are listing Indian properties REITs abroad and the stability/volatility of REIT (REIT-beta) stocks over significant period of time.
1.1 The REIT concept:

7|Page

Real Estate Investment Trust (REIT) is a corporation or trust that uses the pooled capital of many investors to purchase and manage income generating property (equity REIT) and/or mortgage loans (mortgage REIT) and/or mixture of both (Hybrid REIT). REITs are traded on major exchanges just like stocks. They may be granted special tax considerations. REITs offer several benefits over actually owning properties. There is no minimum investment with REITs. REITs do not necessarily increase and decrease in value along with the broader market. However, they pay yields in the form of dividends no matter how the shares perform. REITs can be valued based upon fundamental measures, similar to the valuation of stocks, but different numbers tend to be important for REITs than for stocks. A Real Estate Investment Trust (REIT) is a company that invests its assets in real estate holdings. It buys, develops, manages and sells real estate assets. You get a share of the earnings, depreciation, etc. from the portfolio of real estate holdings that the REIT owns. Thus, you get many of the same benefits of being a landlord without too many of the hassles. You also have a much more liquid investment than you do when directly investing in real estate. The downsides are that you have no control over when company will sell its holdings or how it will manage them, like you would have if you owned an apartment building on your own. REITs allow participants to invest in a professionally managed portfolio of real estate properties. REIT qualify as pass through entities, companies who are able to distribute the majority of income flows to investors without taxation at the corporate level (providing that certain conditions are met). As pass through entities, whose main function is to pass profits on to investors, REITs business activities are generally restricted to generation of property rental income. Another major advantage of REIT investment is its liquidity (ease of liquidation of assets into cash), as compared to traditional private real estate ownership which are not very easy to liquidate. One reason for the liquid nature of REIT investments is the its shares are primarily traded on major exchanges, making it easier to buy and sell REIT assets/shares than to buy and sell properties in private markets. Essentially, REITs are the same as stocks, only the business they are engaged in is different than what is commonly referred to as stocks by most folks. Common stocks are ownership shares generally in manufacturing or service businesses. REITs shares on the other hand are the same,
8|Page

just engaged in the holding of an asset for rental, rather than producing a manufactured product. In both cases, though the shareholder is paid what is left over after business expenses, interest/principal, and preferred shareholders dividends are paid. Common stockholders are always last in line, and their earnings are highly variable because of this. Also, because their returns are so unpredictable, common shareholders demand a higher expected rate of return than lenders (bondholders). This is why equity financing is the highest cost form of financing for any corporation, whether the corporation is a REIT or mfg. firm. An interesting thing about REITs is that they are probably the best inflation hedge around. Far better than gold stocks, which give almost no return over long periods of time. Most of them yield 7-10% dividend yield. However, they almost always lack the potential for tremendous price appreciation (and depreciation) that you get with most common stocks. There are exceptions, of course, but they are few and far between. If you invest in them, pick several REITs instead of one. They are subject to ineptitude on the part of management just like any companys stock, so diversification is important. However, they are rather conservative investment, with long term returns lower than common stocks of other industries. This is because rental revenues do not usually vary as much as revenues at a mfg. or service firm. The Real Estate Investment Trusts must periodically review the property portfolio to find out which assets are likely to generate less than average cash flows in future. Such assets should be disposed and the proceeds can be used for any of the following: Reinvest in properties with higher prospects Repay debt to strengthen the Balance Sheet by, as per the Pecking Order Theory Repurchase the shares from the investors
To qualify as an REIT, in most countries, a real estate company must agree to pay out in dividends at least 90% of its taxable profit. By having REIT status, a company avoids corporate income tax. A regular corporation makes a profit and pays taxes on the entire profits, and then decides how to allocate its after-tax profits between dividends and reinvestment; an REIT distributes all or almost of its profits and gets to skip the taxation.
9|Page

Typical structure of REITS:
1.2 Literature review: The Draft Securities and Exchange Board of India (REIT) Guidelines of 2008 provide the theoretical background for the introduction of REIT in India. The main basic concepts are as follows: 1. REIT is a trust registered under the Indian Trusts Act, 1882 with the object of organising, operating and managing real estate collective investments. 2. Real estate is defined to include land or buildings (irrespective of whether free hold or leasehold), car parks and other assets incidental to ownership of real estate such as fittings, fixtures, etc. However, REITs are not permitted to acquire vacant land. 3. Person setting up a REIT is called a Sponsor. 4. REITs are managed by its trustees. Trustees could be a scheduled bank, trust company which is a subsidiary of a bank, a public financial institution, insurance company or a body corporate. Individuals cannot act as trustees.
10 | P a g e

5. REITs could float schemes which need to be close ended schemes for the purpose of raising public money to invest in income generating real estate properties. 6. Schemes of REITs would be managed by real estate investment management companies (REIMCs). REIMCs are companies incorporated in India with the object of organizing, operating and managing a real estate investment scheme. Real Estate investment whether be it in housing, commercial (office and retail), hospital, hotels and resorts is picking up momentum in India in 2010 as the Indian economy is set to rebound and grow at approximately 8.5% in fiscal period 2010-11 and in double digits thereafter. According to Cushman & Wakefield Report 2009 Survival to Revival Indian realty sector on the path to recovery the demand for housing units between 2009 and 2013 will be 75 lakh units while the demand for commercial spaces between the same five years period will be 195 million square feet. The pressure of population as well as requirement of commercial space for IT/ITES, BPO, KPO and multi-brand retail outlets is the basic driving force for surge in demand housing units and commercial spaces. Similarly the Healthcare industry is growing at a rate of 13% annually and will contribute around 6.1% to GDP by 2012. This growth and potential is due to growing demand for healthcare services in the Indian market which is driven by rising incomes, growing propensity to spend on healthcare (partly through Medi-claim benefits) and an increase in lifestyle related diseases. As per the Travel & Tourism Competitiveness Report 2009 by the World Economic Forum, the growth of Travel and Tourism in India is expected at 7.7% per annum for the next ten years. Hence there will be substantial increase in demand for hotel rooms. The above analysis shows that there will be substantial investment in the real estate in the housing, commercial space, hospital and hotel sectors in India in the next decade. The potential for REIT exist in India provided that the hurdles described in this report as well as the shortcomings in the SEBI guidelines are properly addressed by the Indian Authorities. To meet these above demands for funds, the Department of Industrial Policy and Promotion (DIPP), vide Press Note No. 2 (2005), has permitted FDI up to 100% under automatic route in
11 | P a g e

townships, housing, built-up infrastructure and construction development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts and hospitals). Foreign Direct Investments in the real estate sector in India would also contribute towards making the sector more organized. Besides increasing professionalism in the sector, it would bring in advanced technology and help in the creation of healthy and competitive market environment for both domestic and foreign investors. The availability of built up property which is essential for REITs will be fuelled by investments made by foreign developers in addition to Indian developers due to the relaxation of the FDI policy. If the hurdles are removed and the SEBI guidelines become crystal clear then the potential for REITs as a complement to REMF would be significant for rented properties. 1.3 Choices available for REIT investors: There are different varieties of REITs possible. An ordinary investor can easily be confounded by the investing options available. It is therefore imperative for an investor to first understand the different REITs and then accordingly invest depending on the risk appetite and the economic conditions. The REITs can be broadly classified into:
1. Equity REIT a. Retail REIT - There are a number of specialties in Retail REITs, including malls and shopping centers. Since the cost of construction is significant, measured in tens or hundreds of crore of rupees, there is controlled expansion making excess supply a lesser concern in Tier II and Tier III cities. Investors before deciding to invest in retail REIT has to see whether the locations of the malls and shopping centers are in such neighborhoods which are economically advanced and centrally situated so as to pull crowds and sustain high
12 | P a g e

rentals. In economic recession such REITs may take a beating as high cost merchandise by branded suppliers will not be in much demand. b. Residential REIT - This type of REIT specializes in apartment buildings and/or other residential properties leased to individuals. In a scenario of expanding population, the demand for expected to be significant in all types of cities. c. Industrial/office REIT - The office/ industrial sector has historically been the largest. Office/industrial rental agreements are normally for a long term. As a result agreements entered at the time of economic downturn are locked at less profitable rates for many years. However at the time of high demand and short supply lease agreements are at profitable rates. Office REITs are cyclical whereas industrial REITs generate steady and predictable cash flows because of high lease renewal rates and low capital expenditure and maintenance rates. d. Healthcare REIT - They build, acquire and lease specialty buildings such as hospitals, nursing homes, medical centers and assisted-living facilities. List of clientele for such specialty buildings is limited and once a user leaves, the custom made building may have to renovated/remodeled before becoming useful for another user. Requirement of assisted living facilities (old age homes) is low in India and neighboring countries compared to developed countries. e. Hotels and Resorts REIT- target client is hotels, resorts and serviced apartment chains. The hotel and resort sector is closely tied to the economic, political and social condition of the geographic area to which it is catering. When times are bad, people travel less for business and pleasure, cutting right through the bottom lines of the companies. As a result investors in Hotel REITs have to concern themselves not only with overbuilding but also with the economic, political and social condition of the region in which the hotel is situated.
13 | P a g e
leased
accommodation
is

1.4 Advantages and Disadvantages to REIT investors: Advantages: -- In order to qualify as a REIT for tax purposes, a company must return at least 90% of earnings to its shareholders in the form of dividends. Because of this, the average REIT boasts a roughly +6% annual dividend yield. -- REITs aren't as highly correlated with the major indices as most industries are. As such, they may provide your portfolio with some much-needed diversification and should help to smooth out your overall returns, particularly during market downturns. -- REITs own hard, tangible assets such as land and buildings, and often sign their tenants to long-term lease contracts. Because of this, REITs tend to be some of the most stable companies on the market. Disadvantages: -- Because they can only reinvest up to 10% of their annual profits back into their core business lines each year, most (but not all) REITs tend to grow at slower clip than the average stock on Wall Street. Over time, history has shown that the average publicly traded REIT tends to post annual earnings growth several percentage points below that of the S&P 500. -- Although the business tends to be a fairly stable one, REITs are not without risk. For example, their dividend payments are not guaranteed and the real estate market is prone to cyclical downturns. -- Since they already enjoy a unique tax-advantaged status versus other firms (more specifically, they are allowed to deduct the dividends they pay out from their taxable income), from an investor's perspective, roughly 2/3 of all dividends paid by REITs do not qualify for the new lower 15% tax rate implemented by congress last year. By contrast, the vast majority dividends paid by non-REITs are taxed at this new low rate.
1.5 Methodology:
14 | P a g e

The fundamental issue of whether REITs shall be beneficial for the Indian economic scenario will be addressed by Investigating the features of REITs in various countries who have already adopted such investment schemes Examining existing Real estate investment schemes in India such as REMF and REF and how REIT can complement them Understanding the hurdles that REIT would face in the Indian economic/legal environment Comparison of the performance of REIT stock versus overall stock indices and analyse for structural change in systematic risk of REIT investment, and Looking at the impact of delay in introducing REIT in India leading to companies with investment in Indian rental property establishing REIT like Business Trusts in overseas market such as Singapore. To compare the regulations enacted for implementation of REIT regimes in different countries the official guidelines of different countries having REIT were studied and a comparison table was prepared to highlight the similarities and differences on key issues which effect the operation and success of REIT entities. Moreover the facts and figures for the comparative performance of REITs have been taken from the highly specialised and analytical reports of consultancy firms such as Ernst & Young, KPMG, and Standard & Poors. The existing forms of real estate investments in India were examined by studying the guidelines and operations of Real Estate Funds (REFs) and the guidelines of new Real Estate Mutual Funds (REMFs). The official documents from SEBI for the draft regulations and guidelines on REITs. REFs which are essentially for institutional investors and HNIs are not listed on the stock exchanges for the first three years of their existence. The published interview of Subject Matter Expert (SME) was referred for comparison of different forms of investments. The performance of REIT in US in the last 38 years was evaluated using a model which characterizes the volatility in terms of beta. The fluctuation in beta over four decades was
15 | P a g e

calculated using raw data published by NAREIT, NYSE and the US government Treasury bill statistical data. These input data were fed into a regression model to determine the volatility parameter beta and structural change over time.
2.0 COMPARISON OF FEATURES OF REF, REMF, REIT:

REITs have been in vogue for nearly three decades in USA and Australia, nearly one decade in Singapore and few years in UK. Why is it that REITs have not been introduced in India as yet? Apart from REIT, other methods of investing in Real Estate sector in India are through Real Estate Funds (REF) and Real Estate Mutual Funds (REMF). To an ordinary investor there is confusion as to what are the differences among REIT, REF and REMF. It is of paramount importance to understand the basic or conceptual details of these alternatives to appreciate
16 | P a g e

the benefits they can provide to different types of investors. In fact one can state that these three investment schemes are not alternatives, but complement each other. REFs are not new to India but their presence is not felt by the retail investors. The reason is that these REFs are open for investment only to institutional investors such as corporations, pension funds, private equity firms etc., in addition to High Net-Worth Individuals (HNIs) with a minimum investment of Rs 5 lakh. REFs are also called Realty Venture Funds (Kshitij Venture Capital Funds, DHFL Venture Capital Fund, and Milestone Real Estate Fund). Many of the existing REFs in India have minimum investment amount way above the SEBI requirements. For instance minimum investment amount for HDFC Real Estate Fund is Rs 5 crore, for Kshitij Venture Capital Fund it is Rs 2 crore, for Birla Sun Life it is Rs 25 lakhs (HNIs) and Rs 1 crore (institutional investors), and in case of DHFL Venture Capital Fund it is Rs. 2 crore (HNIs) and Rs. 10 crore (institutional investor). In UK, REFs are known by the name of Pooled Managed Vehicles (PMV). The PMVs are a limited partnership of private equity players, pension funds, HNIs etc REMFs are in between REFs and REITs. Securities and Exchange Board of India (SEBI) has introduced guidelines for REMFs in India in 2008. Although initially several groups expressed interest in REMFs only few have approached SEBI for permission. HDIL and Kumar Housing Corporation are a few groups who have sought approval to launch REMFs but yet not gone ahead with the actual launch. REITs have been introduced in major countries such as USA, Australia, Japan, Singapore, UK etc. it is necessary to examine what is so special about REITs that so many nations have adopted the REIT legislation. It is necessary to study the models of REITs in these countries and compare the same with SEBI guidelines for REMFs and REITs. Only after such a comparison is made, it will be possible to arrive at a conclusion whether REITs have something more to offer than REFs and REMFs. In other words we can justify that REITs have something additional to offer as compared to REFs and REMFs.
Table No. 1 17 | P a g e

Basis Who can invest REF REMF Institutional investors Retail investors in and HNIs addition to institutional investors and HNIs Where can invest Invest at project level, Invest in properties undertaking under construction by construction and buying stake in development of Real companies undertaking Estate properties such construction. In addition must hold at least 35% completely constructed real estate assets Purpose of Seek capital gains Seek capital gains Investment Taxation The Income from an investment in Venture Capital Undertaking is tax exempt Not listed initially. Listed after 3 years from the date of issuance of units. Confusion whether to be taxed as Equity Oriented Funds or Debt Oriented Funds Listed on Stock Exchanges. NAV declared daily. REIT Retail investors in addition to institutional investors and HNIs Invest in constructed property
Listing
Seek regular rental income from owned properties Must distribute 90% of taxable profits in order to gain exemption from corporate taxes May or may not be listed depending upon the country of concern. In US and Australia both listed and unlisted REITs are prevalent. Whereas in Singapore and UK all REITs must be listed.
Hence, REFs are not meant for retail investors and are not a means to get regular income. REMFs are meant for retail investors but do not guarantee regular income. REITs are meant for retail investors and guarantee regular income as well. REITs come closest to directly owning a rental real estate property which is many times not possible for small investors. 2.1 SEBI guidelines for REMFs: 1. Existing Mutual Funds are eligible to launch REMF, if they have adequate number of experienced key personnel/directors in the field of real estate. 2. Sponsors setting up new Mutual Funds, for launching only REMF should have been carrying on business in real estate for a period not less than five years.
18 | P a g e

3. REMFs should be close ended and their units should be listed on a recognized stock exchange, thereby providing liquidity to investors. NAVs of such schemes have to be declared daily. 4. At least 35% of the net assets of the scheme shall be invested directly in real estate assets. Balance may be invested in mortgage backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. Taken together, investments in real estate assets, real estate related securities (including mortgage backed securities) should not be less than 75% of the net assets of the scheme. 5. Each asset valued every 90 days from date of purchase for computation of NAV. To avoid concentration risk, caps have been imposed on investments in a single city, single project, securities issued by sponsor/associate companies etc. The guidelines show that the regulator has christened REMFs with the role of REIT by adding the clause which stipulates that REMFs must compulsorily invest at least 35% in completely constructed real estate assets. For launching REMFs, Mutual Fund companies will need key personnel who are highly experienced in the real estate sector and have the foresight to judge the right real estate property investment. Such individuals are limited in number and their responsibility of managing completed constructed assets will divert their focus from Mutual Funds traditional role of investment in securities. Also since the constructed properties will be valued every 90 days from the date of purchase and NAVs have to be declared daily, the NAVs may not represent the true value of the unit at all times. It would have been much more sensible if REMFs would be able to invest in REITs instead of directly investing in real estate assets. This way mutual funds would have be able to operate to their potential in their core business of investing in stocks and securities. However, this is not a possibility right now as India does not have operating REITs. The above analysis shows that REFs and REMFs cannot completely fill in the shoes of REITs. In fact UK which was having PMVs similar to REFs also chose to introduce REITs in 2007. In order
19 | P a g e

to appreciate the similarities and differences between the REIT operating in various countries a comparison table has been made as shown below:
2.2 REITs Structure of different countries

Table No. 2 Country System Date Established Collective Investment Scheme Listed/Unlisted Closed-end or Open-end Fund Vehicle Investment Real Estate Development USA REIT 1960 No Netherland FBI 1969 Yes Australia A-REIT 1971 Yes Canada C-REIT 1993 Yes Belgium SICAFI 1995 Yes
Both Closed
Both Closed Corporation, Trust 100%
Both Closed Trust
Both Both Trust At least 80%
Only listed Closed Corporation 100%
Corporation, Trust in At least 75%
Dividend requirement Conduit Structure REIT Taxation
At least 50% revenue from rent Yes, Only Only if investment in investment in stapled and active development security development projects structure is of properties used At least 90% 100% None Pay through Tax free Pay through of Trust tax (30%) of unallocated amount
Only with Only if business REIT development property if owned for over 5 years None At least 80% Pay through Trust tax (29%) of unallocated amount Tax free
Corporation 0% tax tax (35%) of taxable unallocated income amount
Gearing Limit
No statutory The maximum gearing limit permitted debt leverage equals the sum of 20% of
Corporation tax (33.99%) and value added tax (3%); however rental income and capital gains are not taxed. There is no There are no Outstanding statutory gearing debt cannot gearing limit restrictions exceed 65% applicable to on REITs of the asset A-REITs value
20 | P a g e

non-real estate assets and 60% of real estate investments
Table No. 3 Country System Date Established Collective Investment Scheme Listed/ Unlisted Closed-end or Open-end Fund Vehicle
Singapore S-REIT 1999 Yes
Japan J-REIT 2000 Yes
France SIIC 2003 No
Hong Kong H-REIT 2003 Yes
UK UK-REIT 2007 Yes
Both Closed
Both
Only listed
Only listed Closed Trust At least 75%
Only listed Closed Corporation At least 75% Limited to 25% of total assets
Corporation, Trust Investment in At least 70% Real Estate Development Only No investment in development projects Dividend At least 90% Over 90% requirement
Both (Only Closed closed exist) Corporation, Corporation Trust At least 75% None
Limited to No 20% of total assets
Conduit Structure REIT Taxation
Pay through Corporation tax (20%) on unallocated amount
Pay through Corporation tax (30%) of unallocated amount
At least 80% At least 90% At least 90% of rental of PAT earnings,50% of capital gains, 100% of dividend income Tax exempt Pay through Tax exempt Corporation tax (33.03%) and value added tax (3.3%) of nonexempt earnings Business income tax (17%) charged on special purpose vehicles Corporate tax on non tax exempt earnings
21 | P a g e

Gearing Limit 35% of gross There is no asset value statutory gearing limit 45% of gross Interest asset value coverage ratio must be 1.25 or greater
All REIT regimes permit REIT to buy properties as long term investments for the purpose of deriving rental income from them. However, many limit their capability to perform non-core real estate related activities such as: Develop for own use- Where the REIT holds the real estate for long-term investment purposes, but undertakes periodic developments to extend the building, add new floor-space or modernize the fit-out. Buy/Develop for resale- Where the REIT acquires real estate primarily to resell it at a profit. This may include acquiring vacant land that is developed and/or subdivided prior to sale. Provide allied services: where the REIT provides non- rental services, such as cleaning and food services for tenants, building and management, property leasing or fund management. Table No 4: Non core activities permitted in different countries: Country US Australia UK Netherlands France Belgium Canada Hong Kong Japan Malaysia South Korea
22 | P a g e
Develop for own use Yes Yes Yes Yes Yes Yes Yes Yes No Yes Yes
Buy/Develop for resale No No Qualified No Qualified Qualified No No No No Qualified
Service provision Qualified No Qualified No Qualified Yes Qualified No No Qualified Qualified

Singapore Yes No No Qualified: May or may not be permitted depending upon the circumstances 2.3 Performance of REIT in different countries: 2.3.1 Market Capitalization: The REIT market was soaring high until the mid of 2007, when the sub-prime crisis broke out in the US. The global market capitalisation for 16 REIT countries in June 2006 was US$ 721 billion which rose to its peak in June 2007 at US$ 829 billion. After that, there had been continuous fall in REIT market capitalisation until June 2009, when it reached its lowest. Between June 2009 and December 2009 there has been rise in the market capitalisation from US $ 430 billion to US $ 586 billion which is still below its peak level of 2007 by 30%.
Graph A:
Global REIT Market Capitalisation

900 800 700 600 500 400 300 200 100 0 Jun/06 829 721 624 430 586 Market Capitalisation in US$ billions
Mar/07
Mar/08
Mar/09
Jun/07
Jun/08
Sep/06
Sep/08
Jun/09
Dec/06
Dec/07
Dec/08
Sep/09
Sep/07
Source: Ernst & Young Global REIT Report 2010
Only a handful of countries had risen in market capitalisation between 2007 and 2009, namely Singapore, Hong Kong and Malaysia among others. Though Singapores market capitalisation dropped by 11% from June 2007 to June 2008, it recouped and rose by 18% from
23 | P a g e
Dec/09

June 2008 to December 2009, highest for any country. Singapore saw a flurry of capital raising activities in the form of placements of new units and rights issue. Both Hong Kong and Malaysia rose in market capitalisation for the two consecutive years. On 30 June 2009, the Malaysian government announced the liberalisation of Foreign Investment Committee (FIC) guidelines for property purchases by foreigners, and the allowance of 100% foreign ownership in fund management companies. These new measures spurred interest on the part of foreign and local institutional property funds and REITs in coming into the market within the short-term future as already the Malaysian are trading at an 8% discount to their Net Asset Value. As a result of the delistings and widespread price correction, the total market capitalisation of South KoreanREITs listed on the stock market slumped US$187 million as of the end of 2008 from US$410 million in June 2008 and further to US$133 million in December 2009. Chart A:
Market Capitalisation
1,000,000 100,000 US$ Millions 10,000 1,000 100 10 1 Year 2007 Year 2008 Year 2009
Table No. 5: Change in market capitalisation:
24 | P a g e

From 2008 to From 2007 to 2009 2008
Country US Australia France UK Japan Singapore Canada Netherlands Hong Kong Belgium Malaysia South Korea
Rose/Fell -8% (%) -9% -11% -10% -23% 18% -8% -8% 8% -2% 1% -68%
by Rose/Fell by (%) -23% -31% -3% -28% -22% -11% -15% -9% 1% -3% 5% -32%
Despite the inclusion of six Australian REITs in the population, market capitalization decreased to 30.52% to US$78 billion on 30 June 2008 compared to US$112 billion on June 2007. For several years AREITs have invested (in most cases successfully) in US properties, mainly in the retail and office sectors, and industrial to a lesser extent. Most recently, AREITs have invested in various European markets as well as into Asia. Approximately 55% of Australian REITs have offshore investment exposure. As a result despite having strong local economic conditions, Australian REITs have performed poorly in the last three years.
Table No. 6: Number of REITs in different countries Country 2009 2008

25 | P a g e
2007
2006

US 142 148 Canada 30 33 UK 20 19 France 44 42 Netherlands 6 8 Belgium 15 14 Australia 57 64 Japan 41 42 Hong Kong 7 7 Malaysia 12 13 Singapore 20 20 South Korea 3 6 Total 427 451 Source: Ernst & Young Global REIT Report 2010 169 26 14 48 7 17 58 41 7 13 16 6 448 253 33 NA 30 9 13 58 38 4 11 11 11 484
2.3.2 Gearing Ratio Chart B
Gearing
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Yr. 2009 Yr. 2008 Yr. 2007
Source: E&Y Global REIT Report 2007, 2008, 2010 All the countries in this study except US, Canada, Japan and South Korea follow valuation of properties at fair value under the IFRS. These four countries value properties at cost. Total assets are higher on a fair value basis than under cost accounting. Thus, for REITs adopting the fair value basis, lower balance sheet gearing ratios are expected. When REITs select the fair
26 | P a g e

value method, the increase or decrease in the assets value is recognized through that entitys operating profit each reporting period. In FY2008, majority of the countries using fair value are faced a devaluation decrement in their operating profit, reflecting the fall in property values. Conversely, REITs measuring property at cost will not have to adjust their operating profit, unless the assets recoverable amount fell below its initial cost. As a result, for many countries following IFRS this was one of the reasons for rising gearing ratios. However, it is noticeable that Singapore, despite following IFRS, witnessed small fall in the gearing ratio for FY 2008. For the same period, in France six REITs were delisted, resulting in a lower gearing. The reduced gearing levels across most major REIT markets from June 2008 to December 2009 highlight the extent to which REITs have been recapitalizing to repair their balance sheets. The falling gearing percentages have been achieved against a backdrop of substantial drops in asset values meaning absolute debt levels have been considerably reduced. Some of the reduction could be attributed to secondary offerings or to selling assets to repay debt. Interestingly, in Europe, UK recorded increased gearing levels, suggesting the level of recapitalization has not matched the falls in asset value. On the other hand, Japan, whose recapitalization is relatively small compared with some other markets, has shown a decline in gearing levels possibly reflecting the relative quantities of asset write- downs coupled with the failure of some more highly geared REITs in the last 18 months. 2.3.3 Beta/Volatility Chart C
Beta as of 31 December 2009

1.4 1.2 1 0.8 0.6 0.4 0.2 0 Beta

27 | P a g e

The effect of the financial crisis is clearly visible from the increased volatility of REIT stocks. Almost all the countries have witnessed risen beta from 2007 to 2009. Australia has seen the highest jump in beta for this period (0.59 in 2007) (0.95 in 2008) (1.17 in 2009) due to high exposure to US property market in addition to dominance of Stapled Securities. The stapled security concept has been on the Australian REIT scene for decades, but in the last few years it has risen to become the dominant structure in the AREIT market. Basically, an active business company is stapled to a passive property trust under this structure. The advantageous taxation treatment is maintained; however the stapled security can engage in higher-risk/return business activities related to the property industry. In the case of UK, listed property companies have converted into REITs, hence more exposure to property development activities. Japan has a high beta of 1.02. Japan has weak economic and real estate fundamentals, an aging population and strong dependence on exports to US and Europe. The J-REIT Index fell 8.2% during the second half against a 5.9% gain in the Nikkei 225 Index. Singapore with a beta of 0.97 is higher relative to other Asian markets due to high exposure oversees investment. Approximately 85% of Singapore REITs have offshore investment.
2.3.4 Rate of Return

Below is the total rate of return of REITs in different countries over one-year and three-years for the year ended on 31 December 2009. This figure records both the income return (i.e., distributions) and capital appreciation on the relevant countrys stock exchange (i.e., movement in market price) for the year to 31 December 2009.
Chart D
28 | P a g e
Total Rate of Return for 1 year ended on 31 Dec 2009

90 80 70 60 50 40 30 20 10 0
Chart E
Return (%)
Total Rate of Return for 3 years ended on 31 Dec 2009
15 10 5 0 Return (%) -5 -10 -15 -20 -25 -30

29 | P a g e

In the last three years globally, REITs experienced a drop in market capitalization and negative rate of return. The Asian market (excluding Japan) had milder decline and have recovered quickly. For instance the total rate of return of Malaysia, Hong Kong and South Korea are positive in the three year period. These Asian countries outperformed Australia, UK and US. This difference in return can be attributed to: Most Asian countries following traditional passive investment model (with lower perceived risk profile) as compared to developed countries. Traditional model entails investment in rental earning completely constructed real estate properties as opposed to developmental property (in properties under construction, development). Notion that Asian countries are a promising market as far as long term growth is concerned. In UK REITs are predominantly listed property groups that converted to REIT status. As a result, they are more exposed to property development risks than most of their international counterparts. Similarly, Australian REITs were relatively more exposed to project development and international investments.
It is believed that the REITs are themselves to be blamed for the problems during the financial crisis. Many REITs decoupled their payout ratios from their underlying earnings in order to maintain their share prices. This encouraged them to borrow in order to pay dividends and resulted in Creeping Leverage. When the crisis occurred and the market capitalization as well as Gross asset value of REITs fell, and they started exceeding their gearing limits, the problems exacerbated. In this next chart the annualised returns of REITs are compared with those of S&P Global Broad Market Index (BMI) for different time periods viz. one-year (September 2008-September 2009), three-years (September2006-September 2009), five-years (Sept 2004-September 2009) and ten-years (September 1999-September 2009). The S&P Global BMI (Broad Market Index) is index measuring global stock market performance of approximately 11,000 companies in 46 countries, and is calculated daily in seven standard currency offerings: USD, Euro, GBP, JPY, AUD, CAD, and LCL.
30 | P a g e

Chart F
Annualized Return (%)

15 10 5 Return (%) 0 1 year -5 -10 -15 -20
Source: S&P REIT Report-Q3-2009
3 year
5 year
10 year
S&P Broad Market Index S&P Global REIT Inbex
Chart G
Annualised Return (%)

15 10 5 0 -5 -10 -15 -20
Source: S&P REIT Report-Q3-2009
S&P Broad Market Index 1 year 3 year 5 year 10 year S&P Global REIT Inbex S&P Global Property Index
31 | P a g e

Chart H
Compund Total Annual Return (%) from Dec 71 to Dec 2008

12 10 Return (%) 8 6 4 2 0 Dow Jones Industrial
Source: NAREIT
NASDAQ Composite
S&P 500
Equity REITs
It can be seen that REITS outperformed other benchmarks over the 30-Year and 10-Year time period. However, over the last 5 years the annualised return from Global REITs Index has been lower than that of broad Market Index (BMI). The annualised return for the 3-Year from S&P BMI and the S&P Global REIT Index was negative. This means that in spite of the short term poorer performance of Global REIT as compared to Global BMI, the 10-Year annualised return (which includes years of bad performance) of Global REIT is much better than that Global BMI. This shows that the short term downfall in Global REITs which was precipitated by the subprime crisis in USA was an aberration and the resilience of REITs has been demonstrated.
2.4 Draft guidelines on REIT by SEBI

Table No. 7 Country Listed or Unlisted Closed-end or Open-end Fund Vehicle Development India Only listed Closed Trust Prohibited from investing in vacant land or engaging in property development activities At least 90% of PAT 20% of total asset value 100%
Dividend requirement Gearing Limit Investment in Real Estate 32 | P a g e
We can see that the draft guidelines are silent on many issues such as the REIT taxation, minimum income from rental sources, gearing restriction etc. We see that the draft model is similar to Hong Kong Model with respect to listing, closed-end structure, organisational structure (trust), dividend distribution requirement and prohibition from undertaking property development activities. Shutting out open-ended schemes for REIT is logical given the peculiarities of its investments real estate. In an open-ended scheme, the flurry of day-to-day entries and exits would necessarily call for computation and publication of Net Assets Value (NAV) daily, which is not possible with a REIT, given that unlike in the case of shares for which daily quotations are available, it would simply not be possible to call upon the valuer to do valuations afresh every day. More important, a REIT simply cannot stand redemption pressures, so common with openended schemes, given that its investments are locked in immovable properties and that the rental income by itself would often not be enough to handle such pressures. Currently the draft guidelines are not specific on the issue of REIT taxation. Ideally, REITs should be pass-through for tax purposes.
2.5 How REIT and REMF complement each other

Real estate mutual funds (REMFs), as per SEBI, would be permitted to invest both in real estate directly as well as in securities, including mortgage-backed securities and shares of companies owning/developing real estate. As opposed to that, under the draft regulations, REITs are permitted to invest only directly in real estate. SEBI wants to keep REITs away from financing properties that are under way beyond 20 per cent of the funds mobilised by a scheme. The return profile under both these investment approaches would also differ. Whereas, REMFs can take development risk and trade in securities, therefore having a potential for higher returns, albeit with a higher risk, REITs would generally invest in stabilised income-yielding assets with lower returns and commensurate risk. In a manner, units of REIT can be likened to fixed-income schemes of mutual funds and those of REMF to growth and balanced funds. The above analysis demonstrates that just as growth funds, debt funds and balanced funds can co-exist, similarly REITs and REMFs can co-exist. Hence they complement each other.
33 | P a g e

3.0 READINESS OF INDIA FOR REITS/REMFS
In this section we identify the requirements for successful implementation of REITs and the current situation prevailing in the country. Table No. 7
Pre-requisites
REITs for different property types such as retail, residential, industrial/office, healthcare, hotel and resorts, storage wherein each property types requires specialised management skills Legal structure is needed in order to organize, systemize and regularize the real estate sector
Current Status
India lacks organised real estate market for different types of properties except for office space for earning rental incomes
No uniform tax structure across states No land title certification provided No real estate regulator Lack of Real Estate trained personnel Lack of Real Estate education at corporate and university level
REITs require portfolio management expertise and leasing and development expertise are necessary to maximize revenue
3.1 Hurdles in the Introduction of REIT/REMF in India

3.1.1Unclear tax rules- It is unclear whether REMF would be treated as Equity Oriented Funds
(EOFs) or not. EOF do not pay long term capital gains tax Moreover, dividends from EOF are totally tax free. The draft guidelines of SEBI on REITs are silent on the issue of taxation. This is a major bone of contention as tax benefits are crucial for the success of REITs/REMFs in India. It may be noted that REITs in the US only took off after tax benefits were extended to the investors.
3.1.2 High Stamp Duty- Stamp duty rate differs from state to state. It is very high in most of
the states viz. Haryana (12.5%), Karnataka (10.5%), Maharashtra (10%), Orissa (14.7%), Rajasthan (10%), UP (10%). This impedes the volume of real estate transactions in India. Under Jawaharlal Nehru National Urban Renewal Mission (JNNURM), one of the mandatory reforms is to gradually reduce the stamp duty to 5% in order to increase the flow of property transactions in the market.
34 | P a g e

Rationale for rationalisation of stamp duty: High stamp duty leads to undervaluation of real estate property which results in loss of revenue and increases the circulation of black money in real estate transactions. Existence of high duty rates in some states and low or moderate duty rates in others lead to diversion of economic activity, which is often unhealthy and economically inefficient.
JNNURM envisages a four step exercise: 1. Fixing of the guidance value by a professional independent body. 1. Statutory backing to the guidance value. 2. Gradual reduction and elimination of the stamp duty remission to certain group of individuals, business and industries. Such remissions reduce the revenue productivity of stamp duty. 3. Widening the scope of the definition of the word Conveyance to widen the tax base and further reduce stamp duty rate without loss of revenue to the state government. Expected Outcomes: An environment that will have a broad-based development of the real estate market, with enhanced flows of FDI and NRI investment. Purchase and sale of properties to become convenient for traders, developers and the common man, resulting in an increase in the volume of transactions and economic activities. Legal and administrative remedies proposed along with rationalization of rate of duty to result not only in checking evasion and avoidance of duty but also in enhancing revenue from other taxes like property tax and wealth tax. The temporary loss in revenue from stamp duties, if it occurs, to be compensated by better valuation, checking of non-registration of property transfers, and increase in the volume of registered documents.
3.1.3 Poor land title records- Land is a State subject in the Constitution, and the systems of
land records management vary from State to State, often even within a State, depending upon their historical evolution and local traditions. Although these systems are diverse in form, they have an underlying unity of themes and objectives and they also suffer from a largely common set of problems.
35 | P a g e

Several departments are involved in managing land records in most of the States, and the citizen has to approach 3 to 4, or even more, agencies for complete land records, e.g., Revenue Department for textual records and mutations; Survey & Settlement (or Consolidation) Department for the maps; Registration Department for verification of encumbrances and registration of transfer, mortgage, etc.; the Panchayats (in some States, for mutation), and the municipal authorities (for urban land records), leading to waste of time, exposure to rent seeking, and harassment. These departments work in a somewhat stand-alone manner, and updating of records by any one of them makes the records of the others outdated. Thus, the records are almost always outdated and dont reflect the ground reality. Also, there is no integration of textual and spatial records, making it difficult to give maps-to-scale with the records of rights (RoRs). The most important activity for updating the records, i.e., survey has been neglected by most of the States. Original survey for cadastral mapping has not taken place in many parts of the country. Also, the earlier technology of lattha and chains for survey is cumbersome, painfully time-taking and costly, and there is need for adopting modern technology across the country. Further, the Registration Act, 1908 provides for registration of deeds and documents, not titles. Merely the transaction is recorded, and the transfer of ownership title remains presumptive only. Also, there is significant time lag between registration and mutation, giving rise to scope of fraudulent transactions in land, disputes, etc. Problems in land records management have been faced in other countries also, but respite has come through introducing the system of conclusive titles, also popularly known as the Torrens system. Australia, New Zealand, the UK, Switzerland, Canada, the USA, Singapore, and also developing countries such as Kenya, Malaysia, etc. have successfully introduced this system. Kenya is a case in point. The British applied the Indian Registration Act, 1908 as it was, to Kenya. But, after its Independence, Kenya amended the Act and introduced the Torrens system. Pondicherry is an example of the system of conclusive titles from within India itself. The French introduced the Torrens system there. However, after Independence, Pondicherry had to regress from conclusive titles to the presumptive titles system prevalent in India due to the provisions of the Registration Act, 1908. The system of conclusive titles is based on 4 basic principles: (i) a single agency to handle land records (including the maintenance and updating of the textual records, maps, survey and settlement operations, registration of immovable property mutations, etc.); (ii) the mirror
36 | P a g e

principle, which states that, at any given moment, the land records mirror the ground reality; (iii) the curtain principle, which refers to the fact that the record of title is a true depiction of the ownership status, mutation is automatic following registration, there is no need of probing into past title transactions, and title is a conclusive proof of ownership; and (iv) title insurance, which refers to the fact that the title is guaranteed for its correctness and the party concerned is indemnified against any loss arising because of inaccuracy in this regard. At the moment, land records in India dont reflect any of these principles.
The centre launched the Computerisation of Land Record (CLR) scheme in 1988-89 to provide land owners with computerised copies of ownership, tenancy and updated copies of records of rights (RORs) on demand. However until mid 2008 only 13 out of 35 states and Union Territories were in a position to provide RORs on demand. In 2008, CLR was merged with Strengthening of Revenue Administration and Updating of Land Records (SRA&ULR) to form National Land Records Modernisation Programme (NLRMP) with the ultimate goal of introducing a system of conclusive titles with title guarantee in India. Jawaharlal Nehru National Urban Renewal Mission Scheme has initiated steps to set up land titling tribunals and land titling appellate tribunals in cities.
3.1.4 Rent Control Act favouring tenants- The real estate scene in India is flawed by land
market distortions. The most glaring ones include inflexible zoning, rent and tenancy laws. Zoning laws, rent controls and protected tenancies have been detrimental to the healthy rental trends in India. They have put a freeze to land in city centres that could be otherwise made available for new retail outlets and flats. These laws also gloss over operational inefficiencies and scuttle competition. Tenants residing could not be evicted for a long time and would not surrender their cheap tenancies on their own volition. The renovation of buildings could hardly happen. One such act favouring the rental property market in India is the Rent Control Act. The Rent control Act needs to be repealed to protect the owner and his/her property from the tenant. Areas of focus should be: Terminating old tenancies Removing constraints on increase in rentals Empowering owner to reclaim their properties without any court proceedings Allowing the market forces to determine the rental amounts
37 | P a g e

If these laws are enacted and strictly enforced there is every chance that more investors will want to enter the real estate market to utilize the rental fees as income. This is especially true for the commercial sector. The tax laws also need to be revised so that renting of properties becomes a financially viable option.
3.1.5 Absence of Real Estate Regulation - The real-estate industry has traditionally been
plagued by a lack of transparency in its working and speculative nature. There is no regulatory body to certify property developers and regulate property transactions. This coupled with archaic property laws, high stamp duty rates, lack of computerized land records and clear titles have led to inaccurate reporting, non transparency of information, property disputes and a thriving parallel economy. Also, due to the unorganised nature of the real estate sector, lack of yield-generating assets of institutional quality into which REITs and REMFs can invest is a major challenge. It is therefore essential that state level regulators (land being a state subject) are set up to oversee these issues and provide an enabling framework so as to facilitate REITs to become an effective tool for institutionalizing real estate in India.
3.1.6 Not well defined Valuation Methodology- It is a known fact that property valuation
methods in India are as varied as the property laws in different states. In absence of any prescribed standard, guidelines or reporting formats, valuers have a lot of flexibility in tweaking the assumptions, calculations and approaches. NHB Residex database should be expanded from present coverage of 15 cities to all the Tier I, II & III towns and cities. As most of the SEZs are cropping up in and around Tier II & III cities, real estate development for residential and hospitality is on the increase. Launch of Residex in more cities along with an additional index for commercial property, will enable proper valuation of assets acquired by REITs.
3.1.7 Service tax on commercial rentals- The High Court of Delhi had ruled that renting of
commercial property would not be subject to the levy of service tax. However, the Budget of 2010 has amended the scope of Renting of Immovable Property Service to directly overrule the High Court judgment and to explicitly cover the activity of mere renting as well and this has been done with retrospective effect from 1st June 2007. Moreover, renting of vacant land where the agreement of contract between lessor and lessee provided for undertaking construction of building/structure on such land for furtherance of business or commerce during the lease period will also be subjected to service tax.
38 | P a g e

Construction of real estate complexes will now attract service tax, unless the entire consideration for the property is paid after the completion of construction, that is, on obtaining the occupation certificate from the concerned authorities. Service tax will now also be levied on additional services provided by a builder to buyers for extra charge like preferential location, internal and external development of complexes. Service tax on the activity of construction would primarily mean, buyers paying higher price for property which is under construction. Pursuant to the Delhi High Court judgment, most industry players refrained from paying service tax pursuant to such transactions. This amendment would have a significant impact on both the real estate sector as also sectors which rely on lease of immovable property for running their business. Further, retrospective nature of the amendment will now result in an adverse impact on the sector and may lead rise to a large amount of litigation. In an industry where agreement of contract between lessor and lessee providing for construction of building/structure on vacant lands are a common phenomenon, an imposition of service tax on such transactions is not likely to go down too well with the real estate sector.
39 | P a g e

4.0 STUDY OF TIME VARIATION OF SYSTEMATIC RISK OF REITS IN USA
Diversification of stock portfolio and diversification of asset portfolio are two different things. In the former, the investor primarily holds a single type of asset (i.e., stock) for different companies, thereby reducing the unsystematic risk (company specific risk). What about systematic risk or market risk? In order to reduce systematic risk diversification of asset portfolio is required. Different asset classes are exposed to different types of market risks and by diversifying among different asset classes there is reduction of exposure to systematic risks. The following section shows the declining systematic risk of REIT from 1972-2006, reflecting acceptance of REITs as an important asset class in investors portfolios. However, from 2007 onwards the systematic risk of REIT started rising owing to the financial crisis resulting from bursting of the real estate bubble. The systematic risk has been evaluated for the NAREIT Price Return Index using the CAPM framework. The REIT-beta has been calculated for various periods and subsequently Time Varying Coefficient (TVC) has also been calculated. Analysis has been made to identify structural change in beta over time (using dummy variable approach). Past studies on REIT-Beta Tsai, Chen and Sing (2007) find that investors might treat REITs like normal stocks result in REITs behave more like stocks than real estate. As time pass by, people more and more realize what REITs real is; the cash flow and the inflation-hedging characteristics of REITS are different to other securities. Therefore, the longer the real estate being securitized, the more investors realize what the asset securitization is, the more like underlying asset, real estate, they will behave. For that reason the beta has structural changes. In the present study the systematic risk of REITs has been calculated for the period 1972-2010 using the CAPM equation as follows: Rnareit,t Rf,t = + nareit (Rm,t Rf,t) Where: Rnareit,t = Monthly return on NAREIT on time t Rf,t = Monthly yield of Treasury Bill on time t Rm,t = Monthly NYSE return on time t nareit = Systematic risk of NAREIT
40 | P a g e

= abnormal return under prevailing market risk In the above equation the nareit (REIT-beta) represents the volatility, or systematic risk of REIT stocks in comparison to the market as a whole.
Calculation of REIT-beta for various sub periods: Table No. 8: Systematic risk for the sub period 1972-1980
Variable Coefficient -0.46 0.89 Std. Error 0.43 0.09 t-statistic -1.08 9.99 P-Value 0.28 0.00
nareit
Table No. 9: Systematic risk for the sub period 1981-1990

nareit
Variable Coefficient 0.14 0.42 Std. Error 0.24 0.07 t-statistic 0.56 6.17 P-Value 0.58 0.00
nareit
nareit
41 | P a g e

It is visible from the above tables that the beta declined for the first three sub periods (i.e., 1972-80, 1981-1990 and 1991-2006). However, there was an increase on the REIT-beta for the last sub period (2007-2010).
What led to the increase in the volatility of REIT-beta for 2007 onwards?
Sub Prime Crisis
Dislocation of Credit Market Exposed the vulnerability of illiquid asset class Real Estate firms unable to obtain finance from banks REIT investors sold down their positions- albeit at a price
From the above analysis of time varying systematic risk of REIT, the calculated statistics show that REIT-beta declined over the period 1972-2006. It can be concluded that there was a continually declining beta indicating the structural change from its behaviour as a stock to its behaviour as a real estate. However, the increase in REIT-beta from 2007-2010 can be viewed as an aberration resulting from the burst in the property bubble which was initiated by the subprime crisis in the USA.
42 | P a g e

5.0 SINGAPORE BUSINESS TRUSTS- PSEUDO REITS
Although there is no gearing limit for a Business Trust, it can impose upon itself the same gearing limits as a REIT. Therefore, a business trust may have a gearing limit of 35%, and up to 60% if it has a credit rating, which is the norm of MAS for Singapore REITs. However unlike a REIT, it can also have a gearing limit of 60% without a credit rating if there is approval from its unit holders. A Business Trust does not have a minimum payout ratio. However, some business trusts follow the REIT requirement of paying out at least 90% of income. A Business Trust does not have a limit on property development activities. For REIT, the limit is 10%, and the major part of its business should be in the form of property rental. However, some business trusts have imposed a limit on property development activities upon themselves, but instead of 10% it can be higher.
5.1 Indian Properties based Business Trusts in Singapore

5.1.1 Ascendas India Trust
It was the first Indian Property based Trust listed in Singapore. It is engaged in rental of office space to IT and ITES sectors in India. The historical performance of the stock price is shown below: Graph B
Ascendas India Trust

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0
Price
Source: SGX REIT Data
The trust was listed in SGX on 1 August 2007 at an offer price of S$1.18. Ascendas India Trust (a-iTrust) had the advantage of being another Trust under the Ascendas brand name, the other
43 | P a g e

being the highly successful Ascendas REIT at that time. On top of that, it was listed when the market was extremely euphoric, and on retrospect, just 2 or 3 months before the all time peak of the market. So it was not surprising that it was able to achieve a closing price of S$1.55 on the first day of trading. The stock eventually peaked at S$1.7 about 3 months later. In the prospectus the projected annual DPU was about 6.85 cents. At S$1.7, the yield was only about 4%.
The peak of its stock price was about S$1.70 around Nov 2007. However, its stock price started to move down from above the S$1.10 level in May 2008 to around the 0.70 level within a relatively short time, even before the collapse of Lehman. The stock price bottomed around 0.38 in Oct 2008. It was due to the depreciation of rupees and conditions of the Indian economy at that time. The stock price started to move up in a significant way around May 2009 after the Indian General Election 2009, when Manmohan Singh, who is pro-economic reforms, was re-elected as the Prime Minister. The stock price was up from around S$0.5 level to the S$0.7 level. Following this, the stock maintained a general uptrend along with the broader market. Another significant movement of the stock price was in the August 2009 period, when it moved down from 0.85 to around S$0.745. This was due to significant selling by the substantial shareholder Great Eastern, which reduced its stake from 5.99% to 4.95%. But the stock price rebounded quite quickly to above the S$0.8 level soon after.
44 | P a g e

5.1.2 Indiabulls Property Investment Trust (IPIT)
Graph C
Indiabulls
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 11/06/2008 11/07/2008 11/08/2008 11/09/2008 11/10/2008 11/11/2008 11/12/2008 11/01/2009 11/02/2009 11/03/2009 11/04/2009 11/05/2009 11/06/2009 11/07/2009 11/08/2009 11/09/2009 11/10/2009 11/11/2009 11/12/2009 11/01/2010 11/02/2010 11/03/2010 11/04/2010
Price
Source: SGX REIT Data
Source: Corporateinformation.com
Indiabulls Properties Investment Trust (IPIT), subsidiary of Indiabulls Real Estate, listed at its issue price of S$ 1 on the Singapore Exchange on 11 June 2008. The stock hit a low before closing the day at S$ 0.90 per share, drop of 11% below its issue price on first day.
45 | P a g e

The stock price fell to its lowest at S$0.14 in October 2008.By May 2009 it rose to S$0.365. Thereafter, in spite of the improvement in Indian there has not been much price movement. Stock price ranged between S$0.20 and S$0.30 in the last six months. IPIT has not distributed any dividend since its inception. As it is, the trust was listed at a very critical time when the financial crisis was at its peak and investor confidence was at its low. Moreover, the two commercial properties in the asset portfolio are not complete and are not rented out. One of the commercial properties, namely Elphinstone Mills is likely to be completed by mid of 2010 and hence not contributing rental income. Moreover leasing remained slow in the 2008-09 and the accelerated decline in demand for office space in its key target markets of the banking, finance, security and insurance sectors might result in the trust being unable to lease the properties at the forecast rates. IPIT posted a net property loss of $568,000 for the period May 7, 2008, to March 31, 2009, instead of the net property income of $103.3 million it had forecast for the April 1, 2008, to March 31, 2009, period in its listing prospectus. The future of the stock of IPIT is dependent on the rental income it is able to derive after the completion of its projects.
5.2 Overview of DLF Office Trust (DOT), Proposed Business Trust of DLF
Singapore based Business Trust registered by the MAS Investing directly or indirectly in a portfolio of income producing Real Estate assets, used primarily as office, IT or ITES and other related purposes, with main focus in India Developing and co-developing real estate used for office, IT,ITES with the objective of holding such properties upon completion Key provisions of Property Fund Guidelines have been incorporated in the Trust deed in order to create a REIT like Business Trust in order to enhance the stability of distribution to unit holders of DOT
46 | P a g e

5.2.1 Structure of Proposed Business Trust of DLF in Singapore
Unit holders
Distribution
Holding of Units
The Trustee Manager
Acts on behalf of unit holders
The Trust
Distribution Management and Trustee Fees
Ownership
Special Purpose Vehicle
Distribution
DLF Commercial Developers Limited (Marketing and Lease Management Services Provider)
Ownership
Marketing and Lease Management Fee

DAL India
Marketing and Lease Management
Income
Ownership
Properties
47 | P a g e

5.2.2 India related risks for DOT
1. Properties located in India are subject to Indian laws and policies relating to Real Estate and the prevailing political and economic conditions in India. The value of the properties could be affected local market conditions such as oversupply, competition from other SEZs or IT parks. 2. Land title in India is uncertain and no assurance of clean title 3. Buildings and other consents may not be granted a. Properties require construction, environmental and zoning permits. However, there is no assurance that the permits will be granted on time or for that matter at all only keeping in mind the track records of Indian issuing authorities. b. Infrastructural support such as roads, electrical power, telecommunications, water and waste treatment require additional approvals and consents from the local service providers 4. DOT has a portfolio of income generating properties situated in different states and localities, subject to local and municipal laws which wary from location to location and from time to time and ensuring compliance is time consuming and costly. 5. SEZ status can be revoked if DAL India or DLF fail to comply with the SEZ laws of India. 6. The distributable amount available with DOT for the unit holders is susceptible to foreign exchange fluctuations. Since the income of DAL India is denominated in Indian rupees, any decrease in the value of rupee will adversely affect the amount of dividend available for unit holders in Singapore. 7. Hostilities emanating from within as well as outside the country in the form of terrorism and extremism may damage the reputation of India in the eyes of its business partners many of whom are MNCs. India may stop attracting MNCs as a favourable destination for setting up offices and commercial units. This will negatively affect the income of DOT.
48 | P a g e

5.2.3 Key Indian tax risks
1. The property may be subject to Capital Gains if disposed of by DAL India which will reduce the available income for repatriation from DAL India. 2. No tax benefits can be extended to any construction activity outside the SEZ premises including water pipeline connections from the source to the SEZ. 3. Bond cum Legal undertaking shall be signed by: o The units operating from the SEZ, which have to ensure that the value of their exports is higher than the value of their duty free imports including capital goods, spares, raw materials, components and consumables including fuels. Hence there should be net positive foreign exchange earnings by the unit.
5.2.4 Trustee manager
5.2.4.1 Roles and Responsibilities of Trustee-Manager are:

Treat unit holders who hold units in the same class fairly and equally Ensure that all payments out of the trust property are made in accordance with The Business Trust Act (BTA) and the Trust deed Report to the authority any contravention of BTA and Securities and Futures Regulations Ensure that the Trust property is properly accounted for Ensure that the Trust Property is kept distinct from the property held in its own capacity
49 | P a g e

5.2.4.2 Structure of Trustee Manager
Board of Directors
Chief Executive Officer
Asset Manager
Investment Manager
Chief Financial Officer
Fund Analyst
Investor Relations Manager
Finance Manager
50 | P a g e

6.0 CONCLUSIONS
From the above analysis the following points can be highlighted; 1. REMFs should not be seen as an alternative for REITs or vice versa. REMF are more suited for financing growth and development projects whereas REITs are intended as source of finance for constructed properties earning rental income. 2. Globally, REITs have been able to weather the storm of recession and the return from REITs for a period of 10 year or more has been higher than the return from major stock indices. 3. REITs have behaved more like real estate than stock as the volatility parameter dropped over time since 1972 until 2007. After 2007 there was a financial crisis and volatility increased which was an aberration. 4. Although REIT stocks are subject to some speculation, there is a phantom floor below which the stocks will carry high dividend yield, preventing further downfall of stock price. This is true in the short run as rental contracts are generally of a medium term nature. 5. There are several hurdles and risks for REITs in the Indian business, legal and taxation setup. These would apply to REITs registered in India in the future and to some extent to those Indian property REITs listed overseas. These hurdles need to be minimised so that the functioning of REITs becomes economically viable.
51 | P a g e

7.0 RECOMMENDATIONS
For REITs to be successful, it should be beneficial for real estate companies as well as for the investors. Financial, taxation and legal constraints need to be addressed to make REITs viable. Real Estate companies are having difficulties in securing new loans as they are currently getting their existing loans restructured. The RBI data shows bank lending reduced from Rs 33,617 crore (in 11 months period ending February 2009) to a mere Rs 842 crore (in 11 months period ending February 2010). Small scale investors face difficulty in acquiring residential and commercial properties for generating regular rental income as their financial capacity and holding power is low. Further REITs enable investors easy entry and exit in ownership of units of real estate assets which is not possible in physical possession. 1. DLF despite being one of the leading real estate companies is facing an economic crunch due to bursting of the property bubble and ensuing recession. As DLF has several rental properties in the categories of Retail, Commercial Complexes, Offices, IT SEZs, which can be transferred to a REIT and thus bring in much needed liquidity into the company. 2. For REIT to be a success the SEBI regulation should be made so that REIT should not be taxed if it distributes majority (e.g. 90%) of its income (pass through entity). As a passthrough entity it does not have to pay corporate income tax on the dividends distributed by it to the shareholders-- it passes the responsibility of paying these taxes onto its shareholders. Hence, such dividends are taxed only at individual income tax level and not at the corporate income tax level. This is beneficial for low and middle income investors who will have to pay tax at a lower slab as compared to high income investors. 3. The Central and the State governments have to modify laws regarding stamp duty, land title records, Rent Control Act i. State governments should adopt a uniform reduction in the rate of stamp duty to 5% across all states in the country. A property changes hands several times, which means the government gets to claim stamp duty charges on a fixed asset for an unlimited number of times. Furthermore, stamp duty should be levied on the value of capital appreciation of the property in question and not on the entire value of the transacted property.
52 | P a g e

ii. Central/State governments should introduce a system of conclusive titles of land ownership (e.g. Torrens System-explained earlier). This will minimise litigations later on. iii. Central government should reduce the capital gains tax. At present properties are highly undervalued as there is an unrecorded cash component in the sale of properties due to these existing taxes. This leads to distortion of the stamp duty and also motivates unclear land titles such as Power of Attorney system leading to litigations later on. iv. State governments should amend the Rent Control Act to ensure that tenant can be easily evicted in case of non payment and further rent can be easily increased upon expiry of the lease agreement without resorting to lengthy court procedure. 4. NHB should expand the Residex database to cover more cities and introduce separate index for commercial properties to enable transparent valuation of properties.
The above recommendations will ensure that real estate companies can successfully float close ended schemes for finance of acquisition of REITs assets. As the REITs will benefit low income/ small scale investors as well, the REIT companies will have good response for such public issues. The benefits of regular rental income will no longer be the domain of high and middle income investors, but will percolate to low income investors.
53 | P a g e

BIBLIOGRAPHY
Draft Real Estate Investment Trusts Regulations 2008, Securities and Exchange Board of India, viewed 7 January 2011, <http://www.sebi.gov.in/commreport/RealEstateReg.pdf>. Draft SEBI (REIT) Regulations 2008, KPMG, viewed 21 January 2011, <http://www.in.kpmg.com/tax%20alert/pdf/Flash%20News%20%20Draft%20REIT%20regulations.pdf>. Foreign Investment in Hospitals in India: Status and Implications2007, World Health Organisation, viewed 15 January 2011, <http://www.whoindia.org/LinkFiles/Trade_Agreement_FDI-1.pdf>. Global Property & REIT3rd Quarter 2009, Standard & Poors, viewed 14 January 2011, <http://www2.standardandpoors.com/spf/pdf/index/GPREIT-Q3-2009.pdf>. Global Real Estate Investment Trust Report 2007, Ernst & Young, viewed 14 January 2011, <http://www.reita.org/live/resources/downloads/Property_investment_global/EandY_Global_ REIT_Report_2007.pdf> Global Real Estate Investment Trust Report 2008, Ernst & Young, viewed 14 January 2011, <http://www.gallen.com/documents/EY-081030-2.pdf> Global Real Estate Investment Trust Report 2010, Ernst & Young, viewed 14 January 2011, <http://www.ch.ey.com/Publication/vwLUAssets/Global-REIT-report-2010-Against-allodds/$FILE/Global_REIT_report_2010_Against_all_odds.pdf>. Murali, D. 2008, Draft REIT regulations lack tax guidance Business Line, viewed 20 January 2011,<http://www.thehindubusinessline.com/2008/01/05/stories/2008010550190901.htm>. Mutual Funds (Amendments) Regulations 2008, Securities and Exchange Board of India, viewed 12 February 2011, <http://www.sebi.gov.in/acts/notificationamend.pdf>.
54 | P a g e

Rationalization of Stamp Duty2006, National Informatics Centre, viewed 12 February 2011, <http://jnnurm.nic.in/nurmudweb/Reforms/Primers/Mandatory/4-Rationalization.pdf>. REITs Around Asia 2H 2008, CB Richard Ellis, viewed 25th January 2011,
<http://www.cbre.co.jp/EN/Research_Center/REITs%20Around%20Asia/REITs%20Around%20A sia%2008H2.pdf>. Sah,V. 2009, Is India ready for REITs?, ICA Institute, viewed 10 February 2011, <http://www.icainstitute.org/opeds/REIT_India.pdf>. Travel & Tourism Competitiveness Report 2009, World Economic Forum, viewed 7 February 2011, <http://www.weforum.org/pdf/TTCR09/TTCR09_FullReport.pdf>. Tsai, I. Chun, Chen, Ming-Chi and Sing, Tien Foo 2007, Do REITs Behave More Like Real Estate Now?, viewed 15 February 2011, <http://ssrn.com/abstract=1079590>. Venture Capital Funds Regulations 1996, Securities and Exchange Board of India, viewed 12 February 2011, <http://www.sebi.gov.in/Index.jsp?contentDisp=SubSection&sec_id=5&sub_sec_id=5>.
55 | P a g e
APPENDIX-1: Monthly Return Data on US REITs, US T-Bills & NYSE

Source: NAREIT/NYSE/US Treasury Month Jan-72 Feb-72 Mar-72 Apr-72 May-72 Jun-72 Jul-72 Aug-72 Sep-72 Oct-72 Nov-72 Dec-72 Jan-73 Feb-73 Mar-73 Apr-73 May-73 Jun-73 Jul-73 Aug-73 Sep-73 Oct-73 Nov-73 Dec-73 Jan-74 Feb-74 Mar-74 Apr-74 May-74 Jun-74 Jul-74 Aug-74 Sep-74 56 | P a g e Rnareit,t 0.33 0.92 -0.44 -0.39 -1.78 -0.68 1.86 -1.26 2.16 1.94 1.96 -0.73 -0.61 -6.56 0.74 -4.73 -4.24 -0.03 1.16 -6.69 6.88 0.16 -14.18 -9.58 1.69 4.23 -4.76 -13.64 -5.90 -10.55 -3.30 -18.26 1.75 Rf,t 0.36 0.36 0.39 0.41 0.39 0.41 0.41 0.42 0.46 0.46 0.44 0.46 0.49 0.52 0.57 0.57 0.57 0.61 0.70 0.74 0.69 0.62 0.63 0.61 0.62 0.57 0.65 0.72 0.73 0.72 0.73 0.78 0.74 Rm,t 2.62 2.63 1.00 0.32 1.30 -2.40 -0.34 3.39 -0.81 0.90 4.44 0.96 -2.69 -4.42 -0.63 -4.82 -2.18 -0.95 5.09 -3.50 5.08 -0.33 -12.77 1.51 -0.18 -0.07 -2.57 -4.56 -4.18 -2.13 -7.50 -9.50 -11.58 Return in %

Oct-74 Nov-74 Dec-74 Jan-75 Feb-75 Mar-75 Apr-75 May-75 Jun-75 Jul-75 Aug-75 Sep-75 Oct-75 Nov-75 Dec-75 Jan-76 Feb-76 Mar-76 Apr-76 May-76 Jun-76 Jul-76 Aug-76 Sep-76 Oct-76 Nov-76 Dec-76 Jan-77 Feb-77 Mar-77 Apr-77 May-77 Jun-77 Jul-77 Aug-77 Sep-77 Oct-77 Nov-77 Dec-77 Jan-78 Feb-78 57 | P a g e 7.10 -10.69 -10.63 29.04 -4.89 7.64 -6.52 3.09 5.06 -1.03 -1.58 -8.89 -2.64 1.32 4.37 12.98 3.69 -1.70 -0.33 -2.27 0.54 2.03 2.70 2.42 0.30 4.08 8.04 0.82 -0.70 -0.44 2.85 -1.48 4.32 2.46 0.77 -2.32 -2.02 6.37 -0.58 -3.79 0.37 0.67 0.64 0.61 0.57 0.50 0.51 0.58 0.53 0.52 0.59 0.64 0.65 0.58 0.54 0.55 0.48 0.49 0.52 0.49 0.53 0.54 0.52 0.50 0.49 0.46 0.44 0.41 0.44 0.46 0.46 0.45 0.49 0.48 0.50 0.53 0.54 0.58 0.58 0.58 0.61 0.61 15.74 -4.67 -2.54 12.62 5.25 2.73 4.48 4.88 4.88 -6.71 -2.50 -3.85 5.69 2.54 -1.18 11.79 -0.31 2.74 -1.22 -1.44 4.45 -0.79 -0.58 2.40 -2.35 -0.11 5.50 -4.20 -2.26 -1.27 0.29 -2.04 4.74 -1.77 -2.20 -0.21 -4.14 3.39 0.30 -6.02 -1.97

Mar-78 Apr-78 May-78 Jun-78 Jul-78 Aug-78 Sep-78 Oct-78 Nov-78 Dec-78 Jan-79 Feb-79 Mar-79 Apr-79 May-79 Jun-79 Jul-79 Aug-79 Sep-79 Oct-79 Nov-79 Dec-79 Jan-80 Feb-80 Mar-80 Apr-80 May-80 Jun-80 Jul-80 Aug-80 Sep-80 Oct-80 Nov-80 Dec-80 Jan-81 Feb-81 Mar-81 Apr-81 May-81 Jun-81 Jul-81 58 | P a g e 3.32 -0.36 -2.37 -0.72 1.59 3.55 0.74 -11.52 0.13 0.11 6.45 -1.03 7.43 0.52 -0.81 7.27 1.56 9.38 -3.43 -12.42 4.68 0.24 5.73 -2.08 -13.87 7.47 1.72 5.24 6.97 1.51 -2.44 6.78 -1.46 -2.87 0.75 -0.05 5.47 0.57 -5.21 3.41 -0.48 0.61 0.62 0.65 0.67 0.70 0.69 0.72 0.76 0.83 0.86 0.87 0.85 0.85 0.84 0.84 0.80 0.80 0.83 0.90 1.04 1.03 1.00 1.01 1.16 1.32 1.11 0.78 0.68 0.72 0.85 0.96 1.04 1.18 1.24 1.17 1.21 1.14 1.19 1.35 1.24 1.31 2.92 7.89 1.19 -1.54 5.36 3.11 -0.94 -11.06 2.49 1.45 4.37 -3.71 5.80 0.43 -2.37 4.21 1.33 5.39 -0.20 -7.41 5.14 2.04 5.84 -0.93 -11.68 4.73 5.04 3.01 6.43 1.36 2.72 1.68 9.82 -3.83 -4.64 1.23 4.18 -1.84 0.28 -1.05 -0.21

Aug-81 Sep-81 Oct-81 Nov-81 Dec-81 Jan-82 Feb-82 Mar-82 Apr-82 May-82 Jun-82 Jul-82 Aug-82 Sep-82 Oct-82 Nov-82 Dec-82 Jan-83 Feb-83 Mar-83 Apr-83 May-83 Jun-83 Jul-83 Aug-83 Sep-83 Oct-83 Nov-83 Dec-83 Jan-84 Feb-84 Mar-84 Apr-84 May-84 Jun-84 Jul-84 Aug-84 Sep-84 Oct-84 Nov-84 Dec-84 59 | P a g e -5.88 -6.21 4.03 5.65 -2.08 -2.01 -2.77 -0.07 1.12 -1.56 -4.29 2.52 6.39 4.17 9.72 4.14 1.21 1.12 2.03 7.73 4.37 -0.49 -1.51 -2.24 -1.39 1.62 1.51 0.86 0.94 0.24 -2.18 0.03 0.31 -3.45 -0.40 -1.75 4.15 3.30 2.06 0.67 0.73 1.39 1.38 1.28 1.03 1.07 1.19 1.23 1.16 1.17 1.11 1.17 1.10 0.95 0.90 0.78 0.76 0.74 0.72 0.74 0.75 0.75 0.74 0.81 0.85 0.88 0.85 0.82 0.83 0.84 0.83 0.84 0.88 0.91 0.97 1.01 1.00 0.99 0.97 0.91 0.82 0.78 -6.37 -5.94 5.39 3.86 -3.09 -2.33 -5.95 -1.17 3.94 -3.81 -2.33 -2.38 11.10 1.02 10.92 4.06 1.44 3.45 2.10 3.03 6.91 -0.15 3.54 -3.17 0.71 1.46 -2.00 2.03 -1.03 -0.86 -4.11 1.41 0.38 -5.86 1.98 -1.85 10.15 -0.06 0.02 -1.47 2.23

Jan-85 Feb-85 Mar-85 Apr-85 May-85 Jun-85 Jul-85 Aug-85 Sep-85 Oct-85 Nov-85 Dec-85 Jan-86 Feb-86 Mar-86 Apr-86 May-86 Jun-86 Jul-86 Aug-86 Sep-86 Oct-86 Nov-86 Dec-86 Jan-87 Feb-87 Mar-87 Apr-87 May-87 Jun-87 Jul-87 Aug-87 Sep-87 Oct-87 Nov-87 Dec-87 Jan-88 Feb-88 Mar-88 Apr-88 May-88 60 | P a g e 4.33 0.94 -1.29 -0.81 2.10 1.71 0.02 -6.19 -3.68 2.14 -2.28 -0.10 3.04 3.02 1.93 -0.27 -1.38 2.99 -0.40 3.42 -2.94 2.84 -1.22 -1.84 1.56 2.31 -0.57 -3.33 -1.70 1.24 -0.60 -2.65 -3.05 -15.04 0.08 2.16 7.33 1.82 -0.61 0.03 -1.82 0.75 0.77 0.82 0.76 0.71 0.65 0.66 0.67 0.67 0.67 0.66 0.64 0.64 0.63 0.59 0.54 0.55 0.56 0.52 0.49 0.48 0.48 0.48 0.49 0.48 0.50 0.50 0.54 0.58 0.57 0.56 0.59 0.64 0.63 0.58 0.60 0.58 0.55 0.56 0.58 0.62 7.44 1.16 -0.28 -0.44 5.19 1.37 -0.54 -0.95 -3.88 4.19 6.13 4.30 0.52 6.87 5.23 -1.31 4.60 1.40 -5.66 6.76 -8.34 5.14 1.59 -2.78 12.02 3.77 2.45 -1.66 0.48 4.58 4.36 3.28 -2.21 -21.28 -7.93 6.66 4.56 4.37 -2.53 1.00 0.22

Jun-88 Jul-88 Aug-88 Sep-88 Oct-88 Nov-88 Dec-88 Jan-89 Feb-89 Mar-89 Apr-89 May-89 Jun-89 Jul-89 Aug-89 Sep-89 Oct-89 Nov-89 Dec-89 Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 61 | P a g e 1.64 0.47 -1.37 -1.10 -1.60 -2.29 -0.91 -0.50 -2.28 -0.79 0.87 1.54 0.15 1.63 -2.08 -1.83 -4.83 -2.18 -2.27 -3.09 -4.03 -1.07 -2.50 -0.70 -3.15 -2.75 -6.90 -7.77 -4.68 5.64 -1.44 7.93 4.37 6.48 1.52 1.61 -3.59 1.11 -0.70 1.19 -1.43 0.62 0.65 0.68 0.67 0.68 0.71 0.75 0.75 0.77 0.80 0.78 0.75 0.70 0.66 0.68 0.69 0.67 0.65 0.64 0.66 0.68 0.70 0.70 0.69 0.68 0.66 0.65 0.65 0.63 0.61 0.59 0.55 0.52 0.53 0.52 0.51 0.53 0.53 0.48 0.46 0.44 4.34 -0.66 -3.30 3.54 2.23 -1.90 1.54 6.46 -2.47 1.97 4.46 3.29 -0.48 7.89 1.53 -0.65 -2.75 1.65 1.98 -7.08 0.90 2.08 -2.87 8.22 -0.69 -0.40 -9.23 -5.21 -0.82 5.88 2.52 3.99 6.86 2.32 0.12 3.71 -4.53 4.31 2.11 -1.54 1.53

Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 62 | P a g e -0.63 3.72 4.33 -3.00 -2.24 -0.57 2.45 -1.93 2.68 -1.53 1.66 -1.02 1.26 1.02 5.80 4.11 6.33 -4.94 -1.77 2.30 1.18 1.80 4.12 -1.91 -5.23 -0.86 2.42 2.94 -4.53 0.98 1.23 -2.53 -0.93 -0.23 -2.41 -4.42 -4.09 5.54 -2.37 2.55 -1.11 0.41 0.37 0.35 0.36 0.39 0.36 0.35 0.35 0.30 0.29 0.27 0.28 0.31 0.31 0.29 0.28 0.28 0.27 0.28 0.30 0.29 0.29 0.28 0.28 0.30 0.30 0.30 0.32 0.36 0.40 0.44 0.44 0.46 0.46 0.48 0.51 0.55 0.60 0.59 0.56 0.54 -4.06 10.02 -1.39 0.92 -2.18 2.31 0.28 -1.97 3.89 -2.20 0.66 0.52 2.96 1.17 0.72 0.94 2.20 -2.38 2.12 0.22 -0.22 3.33 -0.62 1.62 -1.76 1.68 3.07 -2.95 -4.76 1.39 0.78 -2.81 3.01 3.66 -2.47 1.28 -4.02 1.04 1.98 3.37 2.41

Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Jul-96 Aug-96 Sep-96 Oct-96 Nov-96 Dec-96 Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97 Jul-97 Aug-97 Sep-97 Oct-97 Nov-97 Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 63 | P a g e -0.62 3.67 1.41 0.72 0.73 1.46 -2.63 0.26 4.97 1.61 0.17 -0.58 -0.51 1.96 1.01 0.03 3.33 1.46 2.51 3.67 9.51 0.52 -0.55 -1.25 -2.90 2.55 4.41 2.41 -0.78 7.83 -3.16 1.12 1.56 -1.01 -2.20 1.35 -3.91 -1.40 -0.89 -7.16 -10.96 0.52 0.50 0.47 0.47 0.48 0.47 0.47 0.45 0.44 0.42 0.41 0.45 0.46 0.47 0.48 0.49 0.47 0.49 0.46 0.45 0.46 0.47 0.46 0.48 0.50 0.49 0.47 0.46 0.46 0.46 0.46 0.46 0.46 0.44 0.44 0.45 0.45 0.45 0.45 0.45 0.43 2.30 3.28 1.90 3.23 0.23 3.67 -1.15 4.44 1.85 3.20 0.86 1.27 1.28 2.18 0.12 -4.60 2.43 4.57 1.96 6.22 -1.49 4.95 0.91 -4.08 4.63 5.87 4.65 6.78 -4.89 5.62 -2.89 3.77 2.48 0.00 6.42 5.15 0.88 -2.08 2.44 -2.26 -15.81

Sep-98 Oct-98 Nov-98 Dec-98 Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 64 | P a g e 5.84 -3.34 1.24 -3.42 -2.33 -3.13 -1.50 9.11 1.75 -2.21 -4.21 -2.88 -4.58 -3.23 -2.84 1.79 0.00 -1.89 2.24 6.03 0.46 1.76 8.04 -4.49 2.28 -4.78 0.65 5.38 1.15 -1.81 0.13 2.13 1.94 5.08 -2.34 2.75 -4.76 -3.20 4.81 1.49 0.01 0.39 0.34 0.38 0.38 0.38 0.39 0.40 0.39 0.40 0.43 0.42 0.43 0.44 0.45 0.46 0.49 0.51 0.52 0.52 0.51 0.53 0.51 0.51 0.52 0.51 0.50 0.51 0.47 0.40 0.39 0.36 0.33 0.32 0.30 0.30 0.29 0.24 0.19 0.18 0.19 0.18 5.25 7.65 5.13 4.28 0.88 -2.25 3.00 5.05 -1.80 4.15 -3.41 -2.12 -3.15 5.57 0.96 3.03 -4.30 -4.68 9.16 -0.28 0.05 -0.05 -0.31 5.20 -1.67 0.64 -5.52 4.36 1.14 -5.61 -4.84 6.61 1.15 -3.10 -0.69 -4.77 -9.63 2.74 5.93 1.86 -1.86

Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 65 | P a g e 1.36 5.23 0.89 0.85 2.00 -5.59 -0.63 -4.71 -4.99 3.81 0.10 -3.15 1.07 1.16 4.29 5.54 1.84 4.78 -0.03 2.48 1.74 4.02 2.57 3.98 1.84 4.95 -15.59 6.60 2.27 -0.33 7.47 -0.43 4.17 4.03 3.94 -8.11 1.91 -2.46 4.28 3.17 4.13 0.19 0.21 0.21 0.20 0.18 0.16 0.15 0.14 0.14 0.12 0.12 0.11 0.11 0.10 0.11 0.10 0.08 0.09 0.11 0.10 0.10 0.11 0.11 0.10 0.10 0.10 0.12 0.15 0.18 0.18 0.17 0.18 0.19 0.21 0.22 0.24 0.25 0.28 0.28 0.28 0.28 0.11 3.78 -4.39 -0.48 -6.70 -7.50 1.22 -10.33 6.48 4.79 -4.53 -2.45 -3.09 0.56 0.39 5.84 1.29 1.12 1.84 -0.22 5.49 1.93 5.91 1.75 2.16 -1.30 -2.39 0.77 1.86 -3.04 0.85 1.82 1.89 4.61 3.46 -2.20 3.25 -2.08 -2.17 1.83 1.19

Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 66 | P a g e 6.21 -4.68 -0.71 -3.09 3.84 -0.97 6.74 1.06 4.48 -3.38 -3.16 4.44 2.73 3.07 1.47 6.05 4.12 -1.81 7.63 -3.13 -2.94 -0.16 -0.19 -9.49 -9.02 5.11 3.71 0.52 -8.90 -5.15 -0.56 -4.15 3.19 5.78 0.40 -11.84 2.39 1.65 -0.97 -30.50 -22.00 0.30 0.32 0.32 0.35 0.36 0.36 0.37 0.39 0.40 0.41 0.42 0.43 0.44 0.42 0.41 0.42 0.42 0.41 0.42 0.42 0.41 0.41 0.41 0.41 0.41 0.37 0.35 0.34 0.29 0.27 0.23 0.17 0.13 0.15 0.17 0.20 0.19 0.18 0.16 0.12 0.09 3.55 0.30 0.09 -2.56 2.84 1.44 4.51 -0.54 2.15 2.89 -3.29 -0.10 0.98 1.79 0.99 3.57 2.22 1.89 1.29 -1.33 1.59 3.91 3.62 -0.99 -3.15 0.72 4.61 2.78 -4.20 -1.06 -6.28 -1.63 -1.53 5.68 1.15 -8.06 -2.40 -0.54 -9.45 -18.48 -5.81

Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Mean Return 14.61 -16.69 -19.87 3.22 27.41 1.73 -3.26 9.86 11.86 5.67 -5.01 6.52 5.61 -4.86 4.73 8.70 0.17 0.04 0.04 0.05 0.05 0.05 0.04 0.04 0.04 0.04 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.52 3.84 -9.57 -11.28 8.67 10.67 8.96 -1.42 8.65 3.49 4.07 -2.24 5.23 1.36 -4.17 2.34 5.75 0.64
67 | P a g e

REITs Right for India? Analysis of REIT Structure and Performance

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

REITs Right for India? Analysis of REIT Structure and Performance

Uploaded by

Copyright:

Available Formats

2011

REITS- Right for INDIA?

Submitted By: Dhara Badiani KHR2009PGDMF012 PGDM Finance 2009-11

Submitted To: Prof. Bharat Shah

Dhara Badiani Capstone Project Submission 2/26/2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

1.1 The REIT concept:

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

2.0 COMPARISON OF FEATURES OF REF, REMF, REIT:

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

REITS- Right for INDIA? 2011

2.2 REITs Structure of different countries

Both Closed Corporation, Trust 100%

Both Closed Trust

Both Both Trust At least 80%

Only listed Closed Corporation 100%

Corporation, Trust in At least 75%

Dividend requirement Conduit Structure REIT Taxation

Corporation 0% tax tax (35%) of taxable unallocated income amount

REITS- Right for INDIA? 2011

Singapore S-REIT 1999 Yes

Japan J-REIT 2000 Yes

France SIIC 2003 No

Hong Kong H-REIT 2003 Yes

UK UK-REIT 2007 Yes

Only listed Closed Trust At least 75%

Limited to No 20% of total assets

Conduit Structure REIT Taxation

Pay through Corporation tax (20%) on unallocated amount

Pay through Corporation tax (30%) of unallocated amount

REITS- Right for INDIA? 2011

Buy/Develop for resale No No Qualified No Qualified Qualified No No No No Qualified

Service provision Qualified No Qualified No Qualified Yes Qualified No No Qualified Qualified

REITS- Right for INDIA? 2011

Global REIT Market Capitalisation

Source: Ernst & Young Global REIT Report 2010

REITS- Right for INDIA? 2011

Table No. 5: Change in market capitalisation:

REITS- Right for INDIA? 2011

Table No. 6: Number of REITs in different countries Country 2009 2008

REITS- Right for INDIA? 2011

2.3.2 Gearing Ratio Chart B

REITS- Right for INDIA? 2011

Beta as of 31 December 2009

Source: Ernst & Young Global REIT Report 2010

REITS- Right for INDIA? 2011

2.3.4 Rate of Return