Real estate: Real opportunity

Written by fe Bureau | Updated: Oct 22 2013, 14:22pm hrs
With the Securities and Exchange Board of India (Sebi) proposing to allow Real Estate Investment Trusts (REITs) in the country, the stage is set for investors to tap the real estate sector. Globally, these are common investment vehicles which pool investors money and invest in revenue generating assets, such as building, offices, warehouses and malls, and distribute a major part of the earnings among the investors.

Sebi had attempted to introduce REITs earlier as well and issued draft guidelines in 2008, but withdrew them later. When the concept was revisited, Sebi was more in favour of the mutual fund model for real estate investment. But even this could not take off. Now, Sebi has issued a draft regulation to revive an over-five-year old proposal of Real Estate investment Trusts Regulations, 2013, and invited public comments till October 31.

REITs are critical as they provide an exit avenue for developers to commercial properties who can channel money to other projects. The minimum sum required for making an investment in REIT will be R2 lakh. Analysts say REITs will open the gates for investors to invest in real estate sector and boost liquidity of cash-strapped developers.

Samantak Das, chief economist & director, research, Knight Frank India, said the draft regulations give a strong signal that Sebi is going to operationalise the REIT market in India on a high-priority basis.

This is a very positive move, which will enhance the depth of the countrys real estate market and give financing and exit options to developers, on one hand, and avenues for investors, on the other. The timing of this move is important, keeping in mind the prevailing paucity of funds, coupled with the slowdown in economic growth, he said.

A KPMG research note said the Sebi move will revive substantial investor interest in India's subdued real estate market. REITs are a positive move towards a more professionally organised and globally well accepted framework for funding real estate development. The move will also reduce individual speculation in real estate assets, the note said.

The Sebi draft guidelines say that REITs shall be set up as trusts. The relevant parties in a REIT structure will be a trustee registered with Sebi. The main advantage of REITs will be that they will be regulated and accountable to investors fund.

REITs can raise funds through initial offer and also follow-on offers after their listing. A REIT will have to come with an initial offer within 18 months of registration with Sebi and it will be mandatory for them to list all units after the initial offer.

REITs will raise funds from an investor, whether resident or foreign, which will be subject to guidelines specified by the Reserve Bank of India (RBI) and the government. Till the market develops, it is proposed that the units of REITs will be offered to only high networth individuals and institutions. The REITs will have a minimum of 20 investors and the minimum subscription will be R2 lakh per investor and the unit size will be of R1 lakh.

All the investment by a REIT will be in properties or securities in India and at least 90% of its assets will be in completed projects where the occupancy certificate has been given by the local authority to the developer of the project.

Also, investment by REITs can be done in rent-generating properties, where 75% of the project is rented or leased out. The balance can be invested in specified assets like developmental properties, listed or unlisted debt, mortgage-backed securities, equity share of real estate companies, government securities or money market instruments.

Most importantly, REITs will not be permitted to invest in vacant land or agricultural land or mortgages other than mortgage-backed securities. They will be allowed to invest the entire corpus in one project and cannot undertake investment in other REITs. Also, the draft guidelines have mentioned that about 90% of the net distributable income after tax of the REIT should be distributed to the unit holder.

To bring in more transparency, all unit holders of a REIT will enjoy equal voting rights and stringent conditions will be imposed for related party transactions, including detailed disclosures, valuation requirements and investor approval. Also, full valuation, including a physical inspection of the properties, will be carried out at least once a year and will be updated every six months.

Brick by brick

* REITs will open the gates for investors to tap the real estate sector and boost liquidity of cash-strapped developers

* REITs can raise funds through initial offer and also follow-on offers after their listing

* A REIT will have to come with an initial offer within 18 months of registration with Sebi and it will be mandatory for them to list all units after the initial offer

* REITs will raise funds from an investor, whether resident or foreign, which will be subject to guidelines specified by RBI

* Till the market develops, it is proposed that the units of REITs will be offered to only high networth individuals and institutions

* The REITs will have a minimum of 20 investors and the minimum subscription will be R2 lakh per investor and the unit size will be of R1 lakh.

* All investment by a REIT will be in properties or securities in India and at least 90% of its assets will be in completed projects where the occupancy certificate has been given by the local authority to the developer of the project

* Also, investment by REITs can be done in rent-generating properties, where 75% of the project is rented or leased out. The balance can be invested in specified assets like developmental properties, listed or unlisted debt, mortgage-backed securities, equity share of real estate companies, government securities or money market instruments

* REITs will not be permitted to invest in vacant land or agricultural land or mortgages other than mortgage-backed securities

* They will be allowed to invest the entire corpus in one project and cannot undertake investment in other REITs

* About 90% of the net distributable income after tax of the REIT should be distributed to the unit holder

* To bring in more transparency, all unit holders of a REIT will enjoy equal voting rights and stringent conditions will be imposed for related party transactions, including detailed disclosures, valuation requirements and investor approval