REITs give better returns than bonds

Real estate mutual funds were allowed in India in 2006 and regulations concerning them were fine-tuned recently. As a result, several mutual funds schemes in this sector are being expected in the next few months. Peter Mitchell, CEO of Hong Kong-based Asia Public Real Estate Association (APREA), who was in Mumbai to set up a chapter of the association in India, discusses key issues relating to real estate invest trusts (REITs), a variant to real estate mutual funds in an exclusive interview with BS Srinivasalu Reddy. Excerpts:

What brings you to India?

We are planning to set up an APREA chapter in India and China. The association, which was set up in 2001, already has chapters in Hong Kong, Japan and Singapore.

What is the nature of markets in the Asia-Pacific region?

Australia is the most developed in terms of REITs, followed by Singapore, Japan and Hong Kong. REITs have been present in Australia for over 37 years. It has a market size double that of REITs in Asia. Japan entered in 2001, followed by Singapore a year later.

What are the characteristics of a matured market?

The major drivers of REITs include institutional presence, technology, transparency, and high dividend payouts. Other advantages are high liquidity, lower costs and little complexity in buying and selling as they are transacted on stock exchanges unlike individually as is the case right now. Most of them invest in assets with investment grade or above. They give better returns than bonds. This is due to capital gains as well accruing from them.

What is the present status of REITs regulations in India and China?

In India, real estate mutual funds are allowed already. But in China we are not going to see REITs in the near future. It has only been introduced in Shanghai. In a bid to cool down the spiralling real estate market, the Chinese government is putting new caps on foreign institutional investors (FIIs). This is based on a wrong perception. REITs leave a sobering effect on prices due to clarity and transparency they bring to valuations.

What is the level of organisation in Asian REITs markets?

In Australia 70 per cent of the real estate market is in REITs. The opposite is true in case of other Asian countries. The concept is yet to kick off in several Asian countries. Asia has a vast potential for growth, if regulations are put in place constructively as in the case of Hong Kong and Singapore.