Sebi notifies norms for REITs, infrastructure investment trusts

By: ENS Economic Bureau |

Published: September 27, 2014 12:46:02 am

REIT and InvIT are required to make investments either directly or through special purpose vehicles.

The Securities and Exchange Board of India (Sebi) on Friday firmed up regulations that will govern real estate investment trusts, or REITs, and so-called infrastructure investment trusts (InvITs) that the market regulator decided to allow last month. Following a board meeting in August, Sebi had cleared a long-pending proposal to allow Indian firms to launch REITs —a move that will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net worth individuals, and ultimately ordinary investors. All REIT schemes, to start-off with, will be close-ended real estate investment schemes that will invest in property with the aim of providing returns to unit holders. The returns will be derived mainly from rental income or capital gains from real estate. REITs, Sebi said, will be allowed to invest in commercial real estate assets, either directly or through special purpose vehicles (SPVs).

In separate regulations for the two trusts, Sebi said that all related party transactions should be at “arms-length” in accordance with relevant accounting standards. REIT and InvIT are required to make investments either directly or through special purpose vehicles. In the case of PPP projects, money can be put in only through SPV. The minimum public holding in REITs should be 25 per cent while the total number of outstanding units at all times as well as the number of unit holders — who are part of the public — should be 200.

Bhairav Dalal, associate director, PwC India , said reduction in the minimum asset value to Rs 500 crore for REIT IPO will enable more sponsors to enter into the REIT market. REITs can invest in SPVs which are set up as LLPs. Single asset REIT concept was withdrawn thereby reducing the concentration risk. Investment in completed and rent generating assets has been reduced from 90 per cent to 80 per cent and allowing additional 10 per cent in other specified assets will provide additional flexibility and diversify the risk profile.”

Under both the initial offer and follow-on public offer, the REIT should not accept subscription of an amount less than Rs 2 lakh from an applicant, as per the norms. Sebi has said that at least 80 per cent of the value of REIT assets should be invested in completed and rent generating properties.

While the concept of REITs has been in existence in developed markets for several years now, it is a new concept in India and investors need to know what it is and how it works before they put in their hard earned money to invest in them.

Defining REITs:

They are investment trusts that operate much like the mutual funds except for the fact that they invest in income generating real estate assets — commercial, residential etc and thereby look to generate return for the investors within the fund. While mutual funds invest in equities, REITs invest in real estate and make it possible for even the smaller investors to invest in real estate.

Globally, they invest in completed, revenue generating real estate assets and distribute major part of the earning among their investors.

They are beneficial not only to the investors but also to the industry as they provide the developer or a PE fund an additional avenue to exit thereby providing them the desired liquidity.

For investors it is a good option to invest in real estate as you can own a piece of a prime property for a modest sum which otherwise is impossible for small investors. It is also a less risky real estate investment mode as the investors takes a position in a developed property that provides regular income.

Well known in developed markets such as USA, Australia, Singapore, Japan, France, United Kingdom among others, they are managed by professionals.

“For retail investors, they provide an avenue to such investors in properties which they otherwise would not have been able to take an exposure. REITs are also a popular investment option for long term pools of capital such as pension funds and insurance companies primarily since the regular stream of income helps them in managing regular outflow to their investors,” said a consultative paper on draft Sebi REITs Regulations.

Proposed Framework in regulations:

In India, REIT will be set up as a Trust and will have parties such as trustee (registered with SEBI), sponsor, manager and principal valuer with specific responsibilities.

After the registration the REIT would raise funds through an initial offer from investors and get listed. The minimum issue size of the initial offer has been specified at Rs 250 crore and the regulator has specified that the size of assets under the REITs should not be less than Rs 500 crore.

While the fund can be raised from both domestic and foreign investors, the regulator has said that till the market develops, the units of REITs may be offered only to HNIs/institutions and therefore, the minimum subscription size has been kept at Rs 2 lakh and the unit size is proposed at Rs 1 lakh.

In India the REIT will invest in commercial real estate assets, either directly or through SPVs. In such SPVs a REIT shall hold or proposes to hold controlling interest and not less than 50 per cent of the equity share capital or interest.

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