Sebi issues draft guidelines, sets ball rolling for realty investment trusts

Written by fe Bureau | Mumbai | Updated: Oct 11 2013, 17:30pm hrs
The Securities and Exchange Board of India (Sebi) on Thursday issued draft guidelines to set up real estate investment trusts (REITs) in India, reviving a proposal that was put on hold in 2008.

According to the draft guidelines, Sebi has pegged the initial offer size at R250 crore and made listing of units mandatory for all REITs. A minimum public float of 25% has been specified to ensure adequate public participation and float in the units.

REITs are listed entities that mainly invest in income-producing real estate assets, from which most of the income is distributed to its shareholders. Sebi has further said that the size of assets under REIT should not to be less than R1,000 crore, which is expected to ensure that initially only large assets and established players enter the market.

To ensure transparency, Sebi has laid down minimum disclosure requirements in the IPO and FPO document, annual and half yearly reports. The guidelines also specify that the proposed minimum subscription size will be R2 lakh and the unit size will be R1 lakh, while allowing REITs to raise funds from any investors, resident or foreign. However, initially, till the market develops, Sebi has proposed that the units of the REITs may be offered only to high networth individuals/institutions

Since REITs primarily invest in completed revenue generating properties, it has been mandated that at least 90% of the value of the REIT assets shall be in completed revenue generating properties.

The guidelines further say, To provide flexibility, it has been allowed to invest the remaining 10% in other assets as specified in the proposed regulations.

Sebi said REITs would be allowed to invest in the properties directly or through special purpose vehicles (SPVs), wherein such SPVs hold not at least 90% of their assets directly in such properties.

However, where such cases occur, it has been mandated that REIT would have control over the SPV so that the interest of the investors are not jeopardised. Sebi has also clearly said that REITs cannot invest in vacant land or agricultural land or mortgages other than mortgage backed securities. Further, the REIT would only invest in assets based in India. "Investment up to 100% of the corpus of REIT has been permitted in one project subject to the condition that minimum size of such asset is not less than R1,000 crore, Sebi said.

Welcoming the draft norms, the real estate industry has said it would help increase capital flows into the sector and also provide exit route to investors.

This is a welcome move. Once in place, it will provide an additional exit route for investors and enable retail money to be channelised into Indias realty sector through a regulated network, CBRE South Asia CMD Anshuman Magazine said in a statement.

Unitech MD Sanjay Chandra echoed the view and said: Its a progressive step. This will let investors directly participate in the institutional Grade A office space, giving them steady income. Also, it will give a much-needed boost to the commercial real estate business. Developers will benefit by freeing up of capital in the sector.

Consultancy firm PWC India said that Sebi seems to have taken a very pragmatic approach.

(With agency inputs)