New Delhi, Nov 26 (UNI) Assocham today said it has mooted a proposal to the government to introduce Real Estate Investment Trusts (REITs) for bringing the much-needed class of institutional investors to strongly support transparency and reign the discipline of domestic commercial real estate market.
The chamber's proposal has come in view of the assessment which said due to high cost of borrowings, the demand for property purchase in most of Tier II and Tier III cities has fallen by 35 per cent in the first half of current fiscal.
The assessment, conducted by the Assocham itself, reveals that over two crore people in about 25 Tier-II and Tier-III cities are the claimant for buying of dwelling units, but are unable to make purchases as higher borrowing cost have compelled most of real estate developers to defer their projects.
The buyers of dwelling units have also not been able to make payments as high interest rates along with surging inflation have come on their ways dampening their enthusiasm and eroding their budget.
The properties purchases in these cities had registered a growth of over 25 per cent between April-October last year.
The assessment finds that not only the cost factor has compelled the promoters of properties makers to indefinitely defer their real estate projects but non-availability of inputs such as bricks, cement, steel and availability of quality power and delays in obtaining water connections have caused inordinate delays for developers to stick to their schedules as promised in their pre-launch campaigns.
The chamber holds that REITs can also help develop Commercial Mortgage Backed Securities (CMBS) market and create a source of cheaper debt for commercial real estate.
It further holds that since purchase and sale of real estate assets would form part of the activity of REITs, the presence of a large number of REITs can enhance liquidity in the secondary market for commercial real estate.
The increase in liquidity would make the sale of assets, if necessitated in CMBS structure easier, thereby improving the attractiveness of CMBS.
The chamber has pointed out that principal repayments to CMBS investors are made through refinance or sale of property; hence the enhanced liquidity in commercial real estate will make CMBS more viable, in terms of availability of refinance and quicker sale of property.
However, in the case of CMBS originated by a REIT, the REIT would own the property. As a financial investor, the REIT would be more inclined to let the CMBS trust enforce the mortgage and sell the property.
The REIT's franchise with its unit holdrs would improve if cuts its losses from a property that did not provide adequate returns.
CRISIL expects the legal risks associated with taking possession of and selling mortgaged properties to reduce considerably in the case of properties owned by REITs.
As REITs typically own a variety of real estate properties, often even across geographies, they offer a pool of well-diversified properties of CMBS and it results in a better spread of risks as compared to a regional developer who offers mortgages on a few similar properties often located in the same market space.
Diversification will rescue the investors' overall market. This will therefore improve the investment characteristics of CMBS and provide REITs with easier access to lower-cost debt funds.
The analysis of ASSOCHAM is based from the feedback that it received from its well known affiliates real estate members that are developing real estate projects in number of tier II and tier III cities which include Meerut, Bulandsahahr, Muradabad, Bhiwadi, Dehradun, Rudarpur, Chandigarh, Sonepat, Panipat, Manesar, Pune, Nasik, Bhopal, Indore and many other such cities and towns in Southern and other parts of the country.
The developers who gave the feedback to ASSOCHAM include Parsavnath, Omaxe, DLF, Unitech and BPTP.
UNI SG SBA RN2007