The Colombo Stock Exchange (CSE) and the Securities and Exchange Commission of Sri Lanka (SEC) launched Real Estate Investment Trusts (REITs) which gives average investors an opportunity to reap the benefits of real estate investments and the advantages associated with investing in publicly traded securities on the CSE.
While investing in real estate appears to be a popular choice, the rising cost of property poses a significant challenge to individual investors who typically resort to bank loans to finance such investments.
This timely introduction by the CSE and SEC provides greater access to all investor segments to invest in commercial real estate projects and an opportunity to benefit from the spiraling property prices.
REITs were first introduced in the United States in 1960 creating a mechanism for individual investors, especially middle-income earners, to generate income by investing in large commercial real estate. This product has made rapid progress within Asian markets as well with its growing popularity especially in Thailand, Malaysia and India and is also viewed as a mechanism to broadbase real estate ownership within a country. A REIT is a structure which typically owns and operates income-generating real estate. The income-generating real estate assets owned by a REIT may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities and warehouses.
A REIT would enable unit holders to earn a portion of the income that is generated through renting, leasing or selling these properties which needs to be distributed directly to the unit holders of the REIT.
The CSE and SEC have introduced a framework which mandates the distribution of 90% of the generated income to investors.
This innovative introduction, which has been formulated specifically taking into consideration the local environment, would open new horizons for real estate developers and owners to convert completed income generating projects into a REIT, have its units listed on the CSE following the mechanism now made available to them and have them publicly traded in the secondary market, similar to equity securities listed on the CSE.
The framework for REITs has been introduced by the SEC via rules made by the SEC in terms of Section 53 and 13 of the SEC Act which came into effect on July 31, in the form of a Gazette notification.
The comprehensive set of SEC rules will govern the overall mechanism of REITs in Sri Lanka. The CSE has also formulated Listing Rules for the listing of units of REITs. A REIT would enable investors to further diversify their portfolios by investing in this lucrative investment vehicle which would produce long-term returns. Investors would benefit from a stable stream of income, swift entry and exit route through the secondary market and also benefit from the returns of overall real estate asset appreciation.
The economy at large would also benefit from the introduction of REITs with the anticipated creation of jobs, economic growth, increased tax revenue, liquidity through listing and would also attract foreign direct investments into the country. REITs would also need stronger corporate governance and increased transparency which would help the investor community and regulatory bodies to assess the viability and quality of projects.
Similar to any stock market investment, the investor needs to take into account his or her own financial status and also consult an investment advisor before making an investment decision.
A review can also be carried out on the REIT’s disclosure filings, including the annual and quarterly reports, before investing in REITs.
The CSE and SEC will continue to focus on setting up a more conducive environment along with the regulatory authorities to facilitate greater company and investor participation.