Real Estate Investment Trusts [REITs] refers to a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.1
The concept of REITs is not new in countries like US, UK, Australia, Singapore etc. REIT is one of the preferred investment vehicle since it is being managed by professionals having diverse skill bases in property development, acquisitions, leasing etc. Also, it provides opprotunity to retail investors to invest in properties. It is also a popular investment option for long term pools of capital viz pension funds and insurance companies. In view of the significant role it plays, the draft SEBI (Real Estate Investment Trusts) Regulations, 2013 (hereinafter referred to as "draft regulations") has been proposed for introducing REITs in India. In this article an endeavor is made to discuss the various aspects of REIT as per the draft Regulations.
a. "Parties to the REIT" shall include the sponsor, redesignated sponsor, manager, trustee and the principal valuer
b. "Related parties of the REIT" shall include:
i. Parties to the REIT
ii. Any unit holder holding, directly or indirectly, more than 20% of the units of the REIT;
iii. Any associates of the persons mentioned at (i) and (ii) above;
iv. Any promoter or director of the persons included at (i), (ii) and (iii) above;
v. Any associates of the persons included in point (iv) above;
c. "Real Estate" or "property" means land and any permanently attached improvements to it, whether leasehold or freehold and includes buildings, sheds, garages, fences, fittings, fixtures, warehouses, carparks, etc. and any other assets incidental to the ownership of real estate and does Development Rights;
d. "Real Estate assets" means properties held by REIT whether directly or through a Special Purpose Vehicle;
e. "sponsor" means any person and its associates, if any, who set(s) up the REIT and assigned as such at the time of application made to SEBI and who hold(s) not less than 25% of the units of the REIT at the time of making application to SEBI for registration;
f. "Re-designated sponsor" means any person and its associates, if any, who has/have assumed the responsibility of the sponsor from the person as designated under clause (q) of sub-regulation (1) above or any re-designated sponsor thereafter;
g. "Manager" means a company which manages assets and investments of the REIT;
h. "Trustee" means a person who holds the REIT assets in trust for the benefit of the unit holders, in accordance with these regulations;
i. "Principal Valuer" means any person who is a "registered valuer" under Section 247 of the Companies Act, 2013 and assigned as such and who has been appointed by the manager to undertake valuation of the real estate assets;
j. "Value of the REIT" means value of the REIT as assessed by the valuer excluding any debt/ liabilities thereof;
k. "Right-of-first-Refusal" or "ROFR" of a REIT means the right given to the REIT by a person to enter into a transaction with it before the person is entitled to enter that transaction with any other party;
Registration and Structure of REIT
The draft regulations require the registration of REIT with the Securities and Exchange Board of India (SEBI) before carrying out any activity. The REIT shall be set up as a Trust as per the provisions of the Indian Trust Act, 1882 and shall trustee, sponsor, manager and principal valuer as its parties. For the purpose of registration, application in Form A alongwith requisite non refundable fee shall be made. If satisfied, SEBI shall grant the certificate of registration to REIT. Further, SEBI shall have the power to appoint any person to take charge of records and documents of the applicant.
Raising of funds and listing of securities of REIT
As per the draft regulations, the REIT shall be required to initially raise funds through initial offer. Further, it is mandatory for all REITs to lists all its units on the exchanges and shall continue its units to be listed on the exchange unless delisted under the Regulations. The minimum initial offer size and minimum public float of Rs. 250 crore and of 25% respecitively has been specified by the regulations in order to ensure adequate public participation and float in the units.
The funds may be raised by REIT form resident or foreign investor. However, the draft regulations proposed that till the time the market develops, REITs may be offered only to HNIs/ Institutions. Further, minimum subscription size shall be Rs. 2 lakhs and unit size shall be Rs. 1 lakh.
Investment Conditions and dividend Policy
Taking into consideration the nature of REIT to invest primarily in completed reveue gernerating properties, the draft regulations has imposed the following conditions:
- At least 90 % of the value of the REIT assets shall be in completed revenue generating properties.
- To distribute atleast 90% of the net distributable income after tax of the REIT to the investors.
- REIT shall invest only in assests based in India.
- Investment shall not be allowed to be made by REIT in vacant land or agricultural land or mortgages other than mortgage backed securities.
- Investment upto 100% of the corpus of the REIT has been permitted in one project subject to the condition that minimum size of such asset is not less than Rs. 1000 crore.
- Applicant: Applicant must be a Trust and the Trust deed must be duly registered in India under the provisions of the Registration Act, 1908 containing the main objective as undertaking activity of REIT in accordance with the set Regulations.
- Sponsor(s): It shall have net worth of atleast Rs. 20 Crore on a consolidated basis and not less than 5 year experience in the real estate industry on an individual basis.
- Manager: It must have net worth of not less than Rs. 5 crore; not less than 5 years of experience in fund management/ advisory services/ property management in the real estate industry or in development of real estate; and not less than 2 key personnel in its Investment Committee2 having not less than 5 years of experience in fund management/ advisory services/ property management in the real estate industry or in development of real estate.
- Trustee: It should be registered with SEBI under SEBI(Debenture Trustees) Regulations, 1993; not an associate of the sponsor/ manager/ principal valuer and not less than 50% of its directors are independent and are not related parties to the REIT.
- Principal valuer: It shall be appointed in the annual meeting of the unit holders and shall be shanged not less than every 2 years and new principal valuer3 shall be appointed. Principla valuer shall not be an associate of the sponsor/ manager/ trustee and has not less than 5 years of experience in valuation of real estate
Audit of REIT
The accounts of the REIT shall be required to be audited by an auditorand draft audit report shall be examined by the auditor. The auditors shall have access to the books of accounts and vouchers relating to activities of the REIT.
Borrowings and deferred payments
The draft guidelines prescribes that the aggregate consolidated borrowings and deferred payments of the REIT shall never exceed 50% of the value of the REIT assets. If the aggregate consolidated borrowings and deferred payments of the REIT exceed 25% of the value of the REIT asets, for any further borrowing:
a. Credit rating shall be obtained from a credit rating agency registered with SEBI; and
b. Approval of unit holders shall be obtained
Valuation of assets
The valuation shall be done by the principal valuer of all the assets including physical inspection of every property. A full valuation shall be conducted by the principal valuer not less than once every year followed by a full valuation report provided to the unit holders.
In addition to the yearly report, a half yearly valuation of the real estate assets shall be conducted by the principal valuer not less than once every six months for incorporationg any key changes in the past six months. The half yearly valuation report shall be submitted to the exchange within not more than one month from the date of end of the every half calendar year.
The step taken up by SEBI by introducing REITs will be helpful in organizing, operating and managing real estate collective investments and will attract small investors as well in the real estate sector. Further, since REITs offer a less risky option for investing in underconstruction properties, it will serve as a regular income mode for the investors. As per the research conducted by the Asia Pacific Real Estate Association (APREA), India's share of the global investable real estate market is 1.3% at present. REITs shall definitely become a positive move in upbringing the investment in real estate market and will also aim at reducing individual speculations in real estate assets.
2. Not less than half of members of Investment Committee are independent and are not related parties to REIT
3. It shall not be an associate of the earlier principal valuer
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.