Heavy Shortage of Urban Houses, REIT Can Boost Housing Supply

As of 2012, there is a shortage of nearly 19 million houses in urban India, but neither the government nor the private sector is in a position to meet this demand. A report says that a Real Estate Investment Trust has the potential to emerge as an answer to these challenges facing the Indian real estate market. 

About 37.7 crore Indians, comprising 31% of the country's population, live in urban areas according to Census 2011. By 2031, about 60 crore Indians will reside in urban areas, an increase of over 20 crore in just 20 years. 
    
This change in the socio-economic landscape will have a bearing on several things, housing being the foremost, real estate consultancy firm Knight Frank said in a report. 
    
At the same time, The Technical Group on Estimation of Housing Shortage projects the total shortage of dwelling units in urban areas in 2012 to be 18.78 million. The estimated slum population in India is 9.5 crore in 2012. As against this, the number of dwelling units sanctioned under JNNURM in its seven-year mission period was 1.6 million. 
    
The supply of decent affordable housing by private sector has remained woefully inadequate. These findings have become the underpinning of the country's 12th five-year Plan (2012-2017), says the Knight Frank report. 
    
Apart from unavailability of land, inadequate financing options is the main reason for the shortage of fresh supply of houses in the country, which, in turn, is also responsible for high property prices. 
    
At the same time, real estate is amongst the largest mainstream asset classes for investment, the report said. But there is no instrument available in the country to participate in the real estate investment by the common man. 
    

In the NCR, real estate has given a return of over 25% compounded annually in the last 20 years. But, the average middle class cannot participate in this class of investment because of its large ticket size. 
    
In contrast to the huge opportunity presented by the housing shortage, the real estate sector has seen bottlenecks in servicing this unmet demand. While there are varied reasons for this situation, the Knight Frank report says that lack of sustained financing options remains the most critical. 
    
Institutional finance to the sector has seen a slowdown. Bank credit to the sector has slowed down on account of increased risk perception translating to higher provisioning and increased cost of funds. 
    
In the last two years, the growth in banks' credit exposure to the real estate industry has come down from 19.08% in November 2010 to 5.29% in November 2012. In contrast, credit growth for housing loans has marginally increased to 13.25% in November 2012, from 12.21% in November 2010. 
    
Similarly, foreign investment in the sector has also seen a downtrend. First, the overall foreign direct investment (FDI) in the country has declined in the current financial year until October. Second, the share of real estate has declined by an even larger magnitude. From 9% in 2011-12, the share of the sector has fallen to 5% in April-October of financial year 2012-13, in the total inflows in the country, the report said. 
    
Raising money through sale of equity shares to public has worked for several industries, but in the case of the real estate industry, the report said, this route of fund raising has not yielded much result. 
    
While there are reasons ranging from poor performance of past issues to information asymmetry on account of the nature of this industry, the fact remains that IPO route is not a dependable option to raise finance and fund real estate development. 
    

Just two companies managed to raise funds through this route in the last two years, totalling a paltry Rs 187 crore. The last two years have contributed less than 1% to the total IPO money raised by the industry in the last seven years highlighting the uncertainty of this source of funds. 
    
All these factors have contributed to the shortage of fresh supply of houses and are also responsible for high property prices, the report said. 
    
Hence, the report said a sustained effort is required to address the twin challenges in context of the Indian real estate market. One that can address the housing shortage and another that can enable an individual to participate in real estate investment. 
    
A Real Estate Investment Trust (REIT) has the potential to emerge as an answer to these twin challenges facing the Indian real estate market. 
    
A REIT is a company that directly owns income-producing real estate assets and provides a trading mechanism to the investors. In most of the cases, it is commercial projects like office buildings, retail malls and hotels, and in some cases, housing complexes too. On one hand an institutional market of REITs can ensure steady supply of capital to real estate development, which would aid in increasing the supply of houses, and on the other they serve as investment vehicles for individuals. 
    
Investing in real estate involves huge amount of capital. The high cost of residential and commercial property in the top urban centres like the Delhi NCR, Mumbai, and Bangalore acts as a barrier for investors with small sums of investible surplus. While these cities present an extremely attractive real estate market, the high cost of real estate assets inhibit an individual investor in participating in this opportunity. 
    
Whereas, a REIT investment vehicle holds a portfolio of properties and allocates divisible units of the investment vehicle in smaller denominations making small investor participation possible. 
    
Real estate is a productive asset and investors in REIT earn on account of both dividend and wealth accumulation due to appreciation. Dividend accrues from the rentals of the property and wealth accumulation on account of capital appreciation of the underlying property. Consequently, REITs tend to generate a stable and consistent income stream for investors. In India, the report pointed out, in case of commercial properties like office buildings and retail spaces, the rental yield hovers between 9-12% per annum and residential property averages around 2-3% per annum. 
    

While the REIT structure of investing in real estate has immense benefits for the investors, the report said it still lags in terms of implementation in India. 
    
Securities market regulator Securities and Exchange Board of India (SEBI) had issued draft REIT Regulations in 2008. However, things have not moved since that time. In May 2012, SEBI introduced SEBI (Alternative Investment Funds) Regulations to regulate Real Estate Funds. However, these will essentially be non-REIT investment vehicles, namely private equity funds in real estate where the minimum investor contribution is much higher at Rs 1 crore. As a result even as of 2012, REIT guidelines are on the back burner.