Thursday, February 07, 2008

"We are not REIT ready, pal"

Last week I met two senior private equity players and a couple of I-Banking friends. The former had just closed a $2 billion Real Estate and Infrastructure Fund and the latter wants deals in the sector. Between them they face one common problem. Everyone and his uncle have boarded the infra bus and deals get closed too fast. My business is to drive deals and I can't be happier. But the fact is, before I could say D.E.A.L, I hear they're done. It's frustrating sometimes.

So the trend now is to co-invest with others. I can see why they cringe at that prospect, playing a side-kick, but there's no choice. Take a slice of existing projects or be ready to follow a REIT model. Hey, hang on. Our regulators are still mulling a legislation. Here are some inadequacies from the draft code –

a) SEBI Act in its current form does not permit REIT to be regulated by it. It needs to be amended;

b) Proposed regulation talks of only close ended schemes, yet call for listing of REIT units in a Stock Exchange. But REIT units do not come under the definition of`securities’ under Section 2(H) of SCRA that regulates listing of securities. Go, amend SCRA now.

c) Unlike MF schemes that deal in securities, REITs deal in real estate directly. They own pieces of real estate and live off its rental and capital gains. SEBI has to think hard over its mastery over this new domain.

I have one more question. Last year Blackstone acquired Equity Office Properties (a REIT controlled by Sam Zell) for $39 billion. A little later the real estate market collapsed in the US and Blackstone started selling off these assets in a hurry to minimize the dent. Now, how much sense will a close ended scheme in the draft regulations envisage in a sector that’s infamous for its vicious cycles? What if the closure date happens to be in a phase when the prices have hit bottom?

Normally we hold RE assets for a very long time. Like family jewels, RE asset in India is legacy stuff that keep rolling down generations. When it’s a long term asset, why not leave those REIT schemes open ended?

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