Saturday, 17 May 2008

Land Exchanges -- Efficient Way to Real Estate Trading

When we talk of investing, the foremost thought that comes to our mind is the shares and the Stock Markets associated with it. We in India have very less options for investing. however we choose the product, the money turns up in the stock market only. Even the funds like Pension funds, employees funds are finding their way in to stock markets. To find the alternative option of investing is a very daunting task. The assets classes other than stocks for investment include Real Estate, Government Securities, Gold Funds, Gold related products, Municipal Bonds (which are non-existent in India), Trading in Insurance policies, reverse mortgages.

With the REIT (Real Estate Investment Trusts) in vogue (after norms being set now), we have found a new of asset to invest into. But how they would be priced? what would be the mechanism of trading? how effectively would they be able to represent the asset class? These questions are yet to be answered.

As the shares of the company represent the holding of ownership in that comapny, in the same vein, the units of the REIT should reflect the ownership of the same asset class i.e. Real Estate. But how would that effected?

Consider this:

01) Every entity holding any real estate i.e. land (developed or undeveloped), buildings of any kind should get that listed at the Property Exchange.

02) Property Exchange would work in the same way as the Stock market works, the only difference will be instead to trading ownership of company, we would be trading ownership of real estate.

03) The unit that will be traded will be a standardised one like one sq ft or sq mt. All the stock will have the same units.

04) The companies listing their real estate will have to submit their ownership proofs of the real estate to the exchange to be listed.

05) The companies will submit reports like

(a) What kind of land do they own (agricultural or non-agricultural)?

(b) Whether that land is developed & to what extent?

(c) Where that land is located & what is the municipal valuation of that property as per ready reckoner.

(d) For what purpose that is used & what is the income earned from it?

06) The units so listed on the exchange should be converted into demat form.

07) The stamp duty on transfer of such units should be rationalised so that trading in the same is encouraged. The state governments would find their stamp duty revenues increasing manifold after that. Same had happened when stock exchanges were dematerialised.

08) Derivative products can later be launched for the same, once the certain level of trading is established to allow more depth to the market.

09) The purchase of single unit of the entity so listed will represent as holding of equivalent real estate by the concerned person.

10) Later on even the Co-operative Housing Societies should be allowed to list their flats. (better would be having a union of multiple societies being listed as single entity) though this can create problems while taking possession of the units.

11) The valuation of such entity would involve a complete diferent kind of dynamics like municipal valuation, location of the property, projected activity by the company owning that property, how much that property is developed and etc..

12) Later on Property Mutual Funds could be allowed who would still make more easy to hold the real estate across the country for small investor.

13) There would be completely new concepts like EPU (Earning Per Unit of Property held), VPU (Value of Per Unit of Property held), TPV (Total Property Value).

This kind of exchange will try to bring more transparency in the property related dealings. It will make real estate market more vibrant. It will also allow small investors to have holdings in the small part of the land.
The market will allow for price discovery mechanism and also create avenue for small investor in real estate.

This step could be a breakthrough in the type of investment avenue available to small investor, which hitherto was not available to him. Small investor can also reap the benefits growth of real estate market without investing huge funds. This would also enable more liquidity to the real estate. Locating of real estate would be more easier. The person holding certain property would find it easy to convert into cash, which now is very difficult. Even the Company's Stock has gone through similar transformation. We should try to extend the same to the real estate too. If we can have Exchange traded Gold Funds, then we can definitely have Property Exchange also.