Hereby I will prove how the realty boomers arguments are false.

What are the boomers arguments?

1.) Buy today, houses always increase in value in the long run.
WRONG. House prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.
Even Warren Buffett have pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. If a house is 100 years old, it's value in sheltering you is exactly the same as it was 100 years ago. Then came the maintenance as the house didn't renovate itself. It also has taxes, and insurance - costs that always increase and never go away. The price of the house went up about as much as salaries went up.
To put this is simple perspective, vegetable were costing Rs.5-6/kg when 5 digit salary was a rarity.
Today, the prices have gone up by about 4 times but so have the salaries. So, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that salaries rose a proportional amount.

2.) Renting is just wastage of money.
WRONG. As said before renting is now much cheaper per month than owning. If you don't rent, you either:

* Have a mortgage, in which case you are throwing away money on interest, tax, insurance, maintenance, costs that increase forever.
* Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income is sufficient for emergency expenses,retirement etc.

Either way, owners lose much more money every month than renters and that's assuming prices don't correct to very high level & everything is smooth in the economy.

3.) As a renter, you won't have any money left as you will spend them on vacations,cars & hence won't have equity/savings etc.
WRONG. Equity is just money. Renters are actually in a better position to build equity/savings through investing in anything but housing. Renters can get rich much faster than owners, just by investing in conservative stocks & bonds.

* Owners are losing every month by paying much more for interest than they would pay for rent. The tax deduction does not come close to making owing competitive with renting.
* Owners must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity/savings. Only houses are such a guaranteed drain on cash.
* Owners must insure a house, but not most other investments.
* Owners must pay to repair a house, but not a stock or a bond.
* Owners lose their money as house prices reduce. The EMI's remain constant in spite of reduction in rates. At the end of loan tenure, they would have paid almost twice than that of current renters who will buy at logical rates. Keep interest rates in mind. Most of the EMI is not principal amount but interest.

4.) There are great tax advantages to owning a house.
WRONG. Many people believe you can just reduce your income tax by the amount you pay in interest, but they are wrong. Buyers may not deduct interest from income tax; they deduct interest from taxable income. And even then, the tax advantage is not significant compared to the large monthly loss from owning.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.

5.) RE is based on local factors, it's not a national phenomenon. RE of Delhi-NCR,Bangalore & rest of the cities has nothing to do with Pune RE.
WRONG. Lending rates remain the same throughout the country. ALL loans are harder to get. This will drive prices down everywhere.

6.) A rental house provides good income. So, you can rent if you have purchased as investment.
WRONG. Rental houses provide very poor income in hyped areas and certainly cannot cover mortgage payments. Remember there is almost 300% difference between EMIs & rent for the same house.

It's pointless to do the work of being a landlord if you can make more money with no risk, no work, and no state income tax by investing in assured good returns bond.

7.) If owning is a loss in monthly cash flow, but appreciation will make up for it.
WRONG. Appreciation is negative. Prices are going down. It only adds to the injury of already high EMI's.

8.) As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
WRONG. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing now that many house owners are near bankrupt as they don't save anything at the end of the month due to high EMI's.
No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.

9.) House prices never fall atleast in Pune.
WRONG. If you see the RE scenario of 1996, prices crashed by 50% & took a whole 7+ years to recover.
Exact 1996 scenario may not be there today but strong correction is inevitable across the city.

10.) House prices don't fall to zero like stock prices, so it's safer to invest in real estate.
WRONG. House prices won't be zero, but the equity or the principal amount you paid can be zero or even negative. What you will pay as EMIs later in actual terms is not for the principal amount but only the interest as house prices dip. So, you will be only serving the bank.

11.) Prices will soften gradually, won't crash immediately.
WRONG. Prices are falling off a cliff. No one knows exactly what will happen, but it looks like prices will continue to fall for long time. These are just more manipulation of buyer emotions, to get them to buy even while prices are falling.

12.) The bubble prices were driven by supply and demand alone.
WRONG. Prices were driven by low interest rates and risky loans & good returns for investors in initial phases of boom in 2004-05.
Prices went up, interest rates went up & buyers savings went down. So prices are violating the most basic assumptions about supply and demand.

13.) There is lack of land.
WRONG. Ample of land is available & continue to be even in future in Pune. Sales volume are down. Even in Japan (small country with less land), prices went down. Current prices here are the same as that of 23 years ago. If we really had a housing shortage, there would not be so many vacant rentals.

14.) If you don't own, you'll live in a cheap neighborhood later.
WRONG. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.

15.) There's always someone predicting a real estate crash.
TRUE, yet irrelevant. There are very real crashes every decade or so. Even a broken clock is right twice a day.

16.) Local incomes justify the high prices.
WRONG. The mortgage should be more than your 3 years earning. It is much higher today. Most are already in danger/red zone.

17.) You have to live somewhere.
CORRECT. But that doesn't mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the down slide in RE.

18.) It's not a house, it's a home.
WRONG. Wherever one lives in it is home, be it apartment, condo, bungalow , mansion or house. Calling a house a "home" is a manipulation of your emotions for profit.

19.) If you don't buy now, you'll never get another chance.
WRONG. History proves otherwise.
Here's a beautiful quote from a analyst:-
"The real issue isn't whether you will be stuck being a renter all your life, she says. Its whether you'll get so scared about being shut out that you'll buy at the market's peak and be stuck in a property you can't afford or sell."

20.) It would take major economic recession or a major earthquake that wipes out this area in order for the price to fall by over 50%.
WRONG. Even today, if the prices fall by 50%, there will still be very few people who can buy at this levels due to uncertainty in jobs & most importantly high EMIs. Also, look at the rental rates for equivalent houses. Which loss per month is larger? EMI or rent?

contd....
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  • Thats old news Real... :)

    All the IT jobs are already taken by H1-B people from (mostly) India! What they all fear now it all in all offshoring of their jobs. What I see now is someone sitting in India taking a job from an (Indian) H1-B holder from US.

    Originally Posted by realacres
    Kelly Parker was thrilled when she landed her dream job in 2012 providing tech support for Harley-Davidson's Tomahawk, Wisconsin, plants. The divorced mother of three hoped it was the beginning of a new career with the motorcycle company.

    The dream didn't last long. Parker claims she was laid off one year later after she trained her replacement, a newly arrived worker from India. Now she has joined a federal lawsuit alleging the global staffing firm that ran Harley-Davidson's tech support discriminated against American workers - in part by replacing them with temporary workers from South Asia.

    The firm, India-based Infosys, denies wrongdoing and contends, as many companies do, that it has faced a shortage of talent and specialized skill sets in the US.
    Like other firms, Infosys wants Congress to allow even more of these temporary workers.

    But amid calls for expanding the nation's so-called H-1B visa program, there is growing push back from Americans who argue the program has been hijacked by staffing companies that import cheaper, lower-level workers to replace more expensive US employees - or keep them from getting hired in the first place.

    But amid calls for expanding the nation's so-called H-1B visa program, there is growing pushback from Americans who argue the program has been hijacked by staffing companies that import cheaper, lower-level workers to replace more expensive US employees — or keep them from getting hired in the first place.

    "It's getting pretty frustrating when you can't compete on salary for a skilled job," said Rich Hajinlian, a veteran computer programmer from the Boston area. "You hear references all the time that these big companies ... can't find skilled workers. I am a skilled worker."
    Hajinlian, 56, who develops his own web applications on the side, said he applied for a job in April through a headhunter and that the potential client appeared interested, scheduling a longer interview. Then, said Hajinlian, the headhunter called back and said the client had gone with an H-1B worker whose annual salary was about $10,000 less.
    "I didn't even get a chance to negotiate down," he said


    Last month, three tech advocacy groups launched a labor boycott against Infosys, IBM and the global staffing and consulting company ManpowerGroup, citing a "pattern of excluding US workers from job openings on US soil."
    They say Manpower, for example, last year posted US job openings in India but not in the United States.


    "We have a shortage in the industry all right — a shortage of fair and ethical recruiting and hiring," said Donna Conroy, director of Bright Future Jobs, a group of tech professionals fighting to end what it calls "discriminatory hiring that is blocking us ... from competing for jobs we are qualified to do."

    "US workers should have the freedom to compete first for job openings," Conroy said.

    Norm Matloff, a computer science professor at the University of California, Davis, agreed that age plays into it — not because older workers are less skilled but because they typically require higher pay. Temporary workers also tend to be cheaper because they don't require long-term health care for dependents and aren't around long enough to get significant raises, he said.

    Because they can be deported if they lose their jobs, these employees are often loath to complain about working conditions. And even half the standard systems analyst salary in the US is above what an H-1B holder would earn back home.

    Such circumstances concern Americans searching for work in a still recovering economy.
    Jennifer Wedel of Fort Worth, Texas, publicly challenged Obama on the visa issue in 2012, making headlines when she asked him via a public online chat about the number of foreign workers being hired — given that her husband, a semiconductor engineer, couldn't find work.
    Wedel said her husband eventually found a job in the health care industry, taking a $40,000 pay cut.

    "It's a slap in the face to every American who worked hard to get their experience and degrees and has 10 or 15 years of experience," she said, adding that firms want that experience but don't want to pay for it.
    To her, the issue isn't about a shortage of workers who have the right skills. Put simply, she said: "It's the money."

    H-1B visa: Backlash against foreign workers stirs US - Hindustan Times

    >> If these US groups succeed, it will surely have impact on IT cos in India as they will have to hire more local recruits & on-site will become rare. This would mean even lesser money in the hands of IT employees which will have direct impact on RE in cities driven to large extent by IT like Bangalore, Pune & even Gurgaon.
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  • High fiscal deficit: What did Chidambaram do to leave FM Jaitley with half empty coffers?

    Most analysts expected it, but few foresaw it happening so soon. Earlier this week, data emerged from the government showing that the fiscal deficit for the first two months of this financial year had already hit 45% of the budgeted amount for the entire year.

    Expecting the fiscal deficit to come in at 4.1% of GDP for the whole of 2014-15 was widely predicted to be unrealistic, but the speed at which the gap between actual numbers and the projected figure has closed has exceeded earlier years. Last year, for instance, the fiscal deficit was around a third of the budgeted amount in the first two months of the year.
    Essentially, what the government did was roll over, to the next year, payments which would have ideally come in towards the end of the previous financial year.

    Then there is the tactic to give rosy estimates for the coming year, in order to give the markets and economists something to cheer about. Total subsidies for 2014-15 were pegged in the interim budget at just about 0.3% higher than the revised estimates for 2013-14. The government's previous track record in managing subsidies gave little reason to believe this.



    Last year, for instance, revised estimates were higher than their original budgeted amounts by 11%. Despite that experience, budget estimates were pegged at a lower level than a year before. At the same time, expectations of tax revenues are pegged at overly optimistic levels as well. All this means little fiscal room for Arun Jaitley when he presents his first budget next week.

    http://articles.economictimes.indiatimes.com/2014-07-06/news/51107987_1_fiscal-deficit-government-spending-madan-sabnavis


    Btw, Pune builders are giving these types of logic below (published in ToI):- :D

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  • take caution before you go for a big home loan!

    My friend just lost his Job yesterday (Non IT), It came as a big surprise as i thought the economy is looking up with a stable govt in place. Having taken a big home loan he is under severe distress and he did not see it coming, he did not even anticipate this sudden loss of job as there were no visible issues leading to sudden closure of his company, Hope this is a blip and not something that may happen to many companies who have over leveraged.
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  • Builders aur RE bulls theory prove ho ya na ho....is thread ke 1000 page pure go gaye aur age aur badhenge ;)
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  • Originally Posted by punerebuyer
    Thats old news Real... :)

    All the IT jobs are already taken by H1-B people from (mostly) India! What they all fear now it all in all offshoring of their jobs. What I see now is someone sitting in India taking a job from an (Indian) H1-B holder from US.

    Actually its already very common, the Indians who have already got green card, criticize and detest the h1-b Indian workers for keeping their salaries in check.
    CommentQuote
  • Tax exemption increased to 2.5 Lakhs
    80C Limit increased to 1.5 Lakhs
    Home Loan interest exemption increased to 2 Lakhs

    Some cheer for a common man
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  • so this govt was going to control the RE bubble right? :) where are all those who used to give e.g. of BJPs previous rule when they controlled the RE prices!!!

    REITs are going to provide new and better investment routes for RE companies to attract investment. NHB is given another 4000 crores. There have been a lot of policy announcements for RE in the budget but the REIT is the by far the biggest.

    Just shows that no govt can afford to deflate the RE bubble. A dream budget for RE companies. DLF up 11%. Enjoy the bubble :)

    (Updated to reflect the change in DLF share price from 7% to 11%)
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  • Originally Posted by herohiralal
    so this govt was going to control the RE bubble right? :) where are all those who used to give e.g. of BJPs previous rule when they controlled the RE prices!!!

    REITs are going to provide new and better investment routes for RE companies to attract investment. NHB is given another 4000 crores. There have been a lot of policy announcements for RE in the budget but the REIT is the by far the biggest.

    Just shows that no govt can afford to deflate the RE bubble. A dream budget for RE companies. DLF up 11%. Enjoy the bubble :)

    (Updated to reflect the change in DLF share price from 7% to 11%)



    Easy availability of funds will bring down the cost of funds, and in return will prove beneficial to the real estate sector- stabilisation of prices.

    Rationalisation of Reits regulations means money will flow through transparent structures vs. round tripping through tax havens.
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  • Budget 2014 & Real Estate

    Here are some points explained in brief related to RE in budget 2014 :-

    What builders demanded :-

    > Concession in home loan interest rates,
    > Exemption of service tax,
    > Industry status to real estate sector,
    > Cheap credit accessibility for builders,
    > No income tax on builders under section 801B for next 3-4 years :D,
    > Real estate & home loans should be given priority sector status,
    > Reduction of excise duties on all raw materials required for construction,
    > Roll-over of loans taken by builders :D.

    What builders got :-

    > The grant of pass-through status to Real Estate Investment Trust (REIT) from a taxation perspective. Although this was already expected, the clarity now sets the stage for more concrete alternative fundraising routes for real estate developers,
    > Slum development has been made part of corporate CSR activities (no use for us, forum members).

    What home buyers got :-

    > Increase in the deduction limit on interest payment for housing loans from INR 1.5L to INR 2L.

    Impact of the budget on RE & home buyers :-

    From builders' perspective, the most important issues they were expecting - Industry status, access to cheaper capital & roll-over of loans alongwith exemption from income tax which didn't take place.
    As single various clearances for the project is more of state subject, not much can be done on this issue by central Govt. Service tax also remains as it is, so is TDS on sale of flat above 50L 1%.

    What I have seen is some RE bulls got exited due to REITS news. Now for layman to understand this in better way, real estate investment trust (REIT) is a company that owns, and in many cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels, malls etc. In short, they invest money in RE to get regular income for their investors through rentals. So rather than an individual going & buying a shop & putting that on rent, the REIT does it for you & manages your money for the same. Ofcourse, the returns are market based, just like stock markets. Very few actually prefer to finance projects & it is even tough in countries like India in current times as yields are very poor (hence we are seeing large scale exits these days of such funds).

    Also, their primary investments are in commercial sectors where rentals are better, hence residetial market may not be highly impacted due to this. Also, in terms of FDI, there is clause of a lock-in period of 3 years from the date of completion of the project. Now with long delays plaguing the RE sector, this is certainly not easily coming in.

    So, at the end of the day, builders in residential space have nothing much to cheer about as for them, things remain as they are.

    From buyers perspective, the 50k hike in interest deduction for home loan EMI is actually nothing. Even the RE analysts said that this only means that a person who could afford a flat of 50L can now be able to buy a flat of around 53L. Now certainly, these 3L on 50L doesn't mean a make or break situation for RE buyer. Hence, this 50k deduction is only useful for those who are looking at affordable housing in the price range of 20-25L.

    Also, if we remember, many people used to say that since you get interest deduction buy buying flat, do buy a flat & also enjoy appreciation. Now this looked good during RE boom period. Now forget appreciation, returns are now negative. And with PPF limit increased to 1.5L coupled with 80C limit enhanced further to 1.5L, this itself is additional benefit for all the tax payers, whether one buys a flat or not. With this happening, how many would go & buy flats at jacked up prices only for this 50k ??

    Again, the most talked about the budget which proposed the creation of 100 smart cities across India and allocated INR 7,060 crore for the same. Now this means mere 70 Cr per city, which almost nothing when you talk from city's perspective. Having said that, this move certainly is in positive direction from proper urban development perspective.

    And finally the tax slab being increased to 2.5L means additional tax benefit for all tax payers on this 50k, but with increase in inflation (school transport & radio cabs have become expensive due to they being put in ambit of service tax), this amount is not very high. Having said that, the one sector which will benefit the most will be the FMCG (Fast Moving Consumer Goods) sector.

    With MF & debt funds being heavily taxed, it will become even more prudent to put money in bank FD & this will now give sleepless nights to wealth managers. Overall, tax payers now have more avenues to park their money in tax saving instruments & earn better & assured yield than to get tempted to buy RE.

    With more focus on infra development in the country, power sector, modernisation of armed forces, one-rank, one-pension policy & FDI being hiked to 49% in defence & insurance, lot of positive signals have gone out to global business community. For me, this is well balanced budget, especially for a Govt. of just 40 days old; but when seen from residential RE perspective, there is almost nothing in it & so, the price correction shall continue.

    Comments welcome. :)
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  • More money is going to remain in taxpayers hands and it may become an additional inflow into RE.
    Every budget brings about hope and disappointment,but people still have to buy flats,plots with long term perspective in mind.
    RE not getting industry status is a disappointment.
    It is high time RE gets the status of industry and has a regulator who can reign in to some extent the crazy way our RE industry behaves.
    Once things get regularised,all and sundry cannot become a builder.
    Now if you have big plot of land and but cannot recognise between cement and concrete,you still can become a builders.
    These overnight builders will get reigned in if status of industry is accorded and regulators are statutorily appointed.
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  • Originally Posted by rembrants
    Easy availability of funds will bring down the cost of funds, and in return will prove beneficial to the real estate sector- stabilisation of prices.

    Rationalisation of Reits regulations means money will flow through transparent structures vs. round tripping through tax havens.


    REIT are good vehicles to bring in investments into Realty Sector. So, retail investors like us can also become PE investor and invest in projects we feel will grow over time. The problem for our community of builders really is - since this is goverened by SEBI, the REITs will need to as transparent as possible, and as investors - we could put pressure on trust to comply with all rules and regulations that cheat consumers.

    It WILL lead to better transparency and infuse funds for developers. Legal action against REITs will be common if the project does fraud in any way.

    Happy Investing !!!
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  • Originally Posted by vaibav123
    More money is going to remain in taxpayers hands and it may become an additional inflow into RE.

    Why do you think so that this will happen with mere addition of avg 20k/yr ?? Man, this money can't even buy a good freakin phone these days !! And with high inflation, more services coming under the ambit of service tax & deregulation of diesel being continued, this 20k isn't going to do anything for RE. Yes, what it will surely improve is demand for FMCG products & maybe even white goods.
    CommentQuote
  • Pass-through status for REITs comes with riders

    The real estate industry cheered the so-called “pass through” status that was given to Real Estate Investment Trusts (REIT) that was announced by finance minister Arun Jaitley in his Budget speech in Parliament on Thursday. However, details in the explanatory statement accompanying the Budget show the tax incentive given to REITs comes with certain riders.

    REITs are investment entities where the funds drawn from investors are invested primarily in completed, rental income-yielding real estate assets. A part of the income generated from such real estate is distributed among investors as dividends. The structure is similar to that of mutual funds that can be listed and traded on exchanges. REITs are set up as trusts as per the provisions of the Indian Trust Act, 1882 and has trustees, sponsors, managers and principal valuers as parties. The sponsor, which is usually a developer or a private equity fund sets up the REIT.

    The pass through treatment is essentially accorded in the case where REITs are acting as a debt-raising instrument. For instance, if a sponsor or SPV has formed a REIT to raise funds either in foreign or domestic markets through bonds or loans, the trust will deduct a witholding tax, before repatriating the interest income to investors. While the tax is paid by the trust, the tax liability is that of the investor, and not the SPV or the REIT. “The special tax regime says that no tax is levied on interest income received from the SPV in the hands of the trust and no withholding tax is levied at the level of SPV. Withholding tax is levied in case of payments of this interest income to unit holders at 5% in case of non-resident unit holders and at 10% in case of resident unit holders," explains Pranay Bhatia, partner at consulting firm BDO India LLP.

    However, in case where an SPV is distributing dividend on equity to the trust (which in turn will repatriate to the investor), it will be subject to dividend distribution tax (DDT) at the level of the SPV, but exempt in the hands of the trust and eventually the unit holders.
    Also, REIT units when traded on the stock exchanges would attract similar tax treatments as equity shares, and will be liable to levy of Securities Transaction Tax. While these units will be exempt from the levy of long term capital gains, they will attract short term capital gains tax at the rate of 15%.

    Pass-through status for REITs comes with riders - Financial Express

    ^^ So, REIT may not be easy way for builders to raise money, nor lucrative for investors to put money in REIT with all that is highlighted in bold. And with REIT going for COMPLETED projects, wonder how can this cheer the builders who are struggling to complete their projects ??
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  • Originally Posted by realacres


    What I have seen is some RE bulls got exited due to REITS news. Now for layman to understand this in better way, real estate investment trust (REIT) is a company that owns, and in many cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels, malls etc. In short, they invest money in RE to get regular income for their investors through rentals. So rather than an individual going & buying a shop & putting that on rent, the REIT does it for you & manages your money for the same. Ofcourse, the returns are market based, just like stock markets. Very few actually prefer to finance projects & it is even tough in countries like India in current times as yields are very poor (hence we are seeing large scale exits these days of such funds).


    Where do u get ur incorrect data from? REITs are a financing structure that can be used for any damn thing. Pls check on the different types of REITs that exist today the world over.

    Here is one link to help you start off your analysis

    http://www.sec.gov/investor/alerts/reits.pdf

    NAREIT | REIT.com



    Also, their primary investments are in commercial sectors where rentals are better, hence residetial market may not be highly impacted due to this. Also, in terms of FDI, there is clause of a lock-in period of 3 years from the date of completion of the project. Now with long delays plaguing the RE sector, this is certainly not easily coming in.


    Again from where are u getting this info that REIT mostly invest in commercial sector??? One of the biggest REITs in US is Equity Residential with a market cap of 23 billion dollars and it owns more than 160,000 residential properties in the US.

    Why do u think REITs will only invest in the commercial sector when the move to online retailing is causing malls to shut down all over the developed world??

    Again REIT is just a finance structure where special laws apply like they dont need to pay corporate tax and in return the REIT has to pass most of its income back to the investor.

    This benefit along with the listing of REIT on public exchanges that some countries mandate makes it a very tempting asset class. In India dividends are not taxed in hands of the investor. So is Infosys pays 50 INR as dividend then Infosys pays the dividend tax and not the investors who has bought shares.

    Now if REIT dont pay any tax as they are a pass thru entity then imagine the tax benefit for the investor. No dividend tax, no corporate tax and no income tax. Plus the shares are listed which means better liquidity than buying and selling a property.

    So to say that REIT law is just another non-event is like saying the growth of IT in India is a non-event as far as indian RE is concerned.



    So, at the end of the day, builders in residential space have nothing much to cheer about as for them, things remain as they are.


    Wrong on so may levels. Pls check data on how REITs function the world over. REITs are NOT restricted to commercial space and they are not limited to the commercial sector in India. Plus in India most of the townships and big complexes have a commercial component.

    Also REITs do invest in housing projects from the very beginning - buying land, construction, selling etc etc. Again the imp thing to remember is that a REIT is just a finance structure and there is no limitation on which stage of the RE cycle they can come in.

    Pls dont have your bear blinkers on :)
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  • Originally Posted by realacres
    The real estate industry cheered the so-called “pass through” status that was given to Real Estate Investment Trusts (REIT) that was announced by finance minister Arun Jaitley in his Budget speech in Parliament on Thursday. However, details in the explanatory statement accompanying the Budget show the tax incentive given to REITs comes with certain riders.

    REITs are investment entities where the funds drawn from investors are invested primarily in completed, rental income-yielding real estate assets.


    Big fat lie. The person who this article has no clue about how REITs really work. Real Estate company often form REITs to build projects. REITs often invest in residential projects so to say that REITs primarily invest in commercial or just completed project is just plain wrong.



    A part of the income generated from such real estate is distributed among investors as dividends. The structure is similar to that of mutual funds that can be listed and traded on exchanges. REITs are set up as trusts as per the provisions of the Indian Trust Act, 1882 and has trustees, sponsors, managers and principal valuers as parties. The sponsor, which is usually a developer or a private equity fund sets up the REIT.

    The pass through treatment is essentially accorded in the case where REITs are acting as a debt-raising instrument. For instance, if a sponsor or SPV has formed a REIT to raise funds either in foreign or domestic markets through bonds or loans, the trust will deduct a witholding tax, before repatriating the interest income to investors. While the tax is paid by the trust, the tax liability is that of the investor, and not the SPV or the REIT. “The special tax regime says that no tax is levied on interest income received from the SPV in the hands of the trust and no withholding tax is levied at the level of SPV. Withholding tax is levied in case of payments of this interest income to unit holders at 5% in case of non-resident unit holders and at 10% in case of resident unit holders," explains Pranay Bhatia, partner at consulting firm BDO India LLP.

    However, in case where an SPV is distributing dividend on equity to the trust (which in turn will repatriate to the investor), it will be subject to dividend distribution tax (DDT) at the level of the SPV, but exempt in the hands of the trust and eventually the unit holders.
    Also, REIT units when traded on the stock exchanges would attract similar tax treatments as equity shares, and will be liable to levy of Securities Transaction Tax. While these units will be exempt from the levy of long term capital gains, they will attract short term capital gains tax at the rate of 15%.



    REITs that trade on the stock exchange has a big advantage. Not only is there a better dividend but there are no long term capital gains are also not taxed.

    Also consider this one big advantage of REIT over investing directly into RE.

    If I invest in RE and sell if after 3 yrs I still have to pay capital gains tax unless I invest the gains in a special bond (NHAI bond etc) which earns around 3% less than normal FDs.

    Instead if I invest in REIT stock then I dont have to pay any capital gains tax if I sell the stock after 3 yrs. 0% capital gains. Forget the liquidity aspect but just the tax benefit of a REIT is so overwhelming that any sane person would go and buy REIT stock.

    People dont need to worry about approvals, completion, maintenance etc etc. The REIT manages all that and the investor has a liquid asset on his books. How is this not a good sign?

    The market of RE is much bigger than any other market - power, telecom, IT etc etc. Instead of buying into companies like Reliance Power that plan to build mega projects yrs down the line wouldnt investors instead prefer to buy stock in REIT that has income generating assets from day 1???


    ^^ So, REIT may not be easy way for builders to raise money, nor lucrative for investors to put money in REIT with all that is highlighted in bold. And with REIT going for COMPLETED projects, wonder how can this cheer the builders who are struggling to complete their projects ??


    Wrong on all counts. REITs are the easiest way to raise money. Investors get liquidity and tax benefits. REITs can be for proposed, ongoing or completed projects. So let this one go cause no amount of spin is going to turn this into something that is -ve for RE :)
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