Invest in real estate, they say. It costs only Rs x a square foot, they add. But you cannot buy a couple of square feet of land even as an investment.

And that's why the idea of a real estate investment trust, or Reit, is so attractive. After a long wait, the Securities and Exchange Board of India has drafted guidelines on Reits to be launched in India. The regulator is expected to issue the final guidelines later this year. 

How will it work?

A Reit will be structured in a way similar to a mutual fund. The sponsor company will need to set up a real estate investment management company that will manage the funds on a day-to-day basis and will report to a real estate investment trust, in whose hands your money will be entrusted.

The investment management company and the trust will then launch real estate schemes that will solicit monies to be invested in real estate. The schemes will only be closed-end and will be listed on the stock exchanges within six months of their launch. 

A Reit will then invest the money it collects in various real estate projects. It will not be allowed to invest in equity and debt securities of real-estate companies; it must invest only in real estate and directly. Reits will not be allowed to invest in vacant plots either. They would need to invest in developed properties that they can then rent out. The rental income from these will be your -- the unitholder's -- returns. So, these are essentially income-earning rather than capital-growing instruments.

Reits will be income-generating instruments, as they will have to distribute at least 90 per cent of the gains made in a year as dividends. A Reit would not be allowed more than 15 per cent in a single real estate project and more than 25 per cent in real estate projects developed and marketed by a single group of companies. 

Reits will have to appoint an independent property valuer. The principal valuer will have to value all the underlying real estate once a year or when a new scheme is launched. Based on the valuer's reports, a Reit scheme will disclose its net asset value. 

The Sebi draft guidelines are, however, not clear on the frequency of NAV disclosures. Real estate experts had earlier objected to daily NAV declarations on the ground that valuing real estate on a daily basis was neither feasible nor did it make sense as prices do not change noticeably every day. The present guidelines indicate that NAVs will need to be declared once a year on an average.

What may also happen, once the final guidelines are issued, is that all underlying real estate would have to be valued once a year, but the NAV will need to be updated or declared every time any underlying real estate is valued.

To understand this better, assume that a Reit scheme buys four properties at the end of the four quarters of a given year, in March, July, September and December. If these properties need to be valued after each of them completes a year, the Reit will have to declare NAV four times a year, once every time its underlying property is valued. 

How much returns?

The draft guidelines are silent on a Reit's cost structure and taxation incidences. Although it's too early to make predictions, real estate players expect a return of around 10-15 per cent returns per annum. "Typically, this will be rental income. But once in three to five years, a Reit could also sell a property and distribute the proceeds to unitholders. This is when unitholders will make a capital gain," says Ambar Maheshwari, director (investment advisory), DTZ, a real estate advisory firm.