REITS (REAL ESTATE INVESTMENT TRUSTS)

A Real Estate Investment Trust (REIT) is a trust that pools resources by offering units to the investors. Such funds are used to acquire and manage income producing properties and income generated from such properties is distributed to investors. REITs receive special tax considerations and are characterized by lower transaction costs. 

The concept of Real Estate Investment Trust was first introduced in 1960’s in the United States through a legislation authorizing REITs passed by the Congress. Realizing the benefit that a REIT provides to the population of the country, economy in general and real estate industry in particular 

, other countries introduced REIT legislations subsequently such as Australia in 1985 , UK and Germany in 2007 , Singapore in 1999, Japan in 2000 , Hong Kong in 2003 and Philippines in 2009. 

SEBI also considering the developments in the Indian Capital Market and the announcement by Hon’ble Finance Minister in the annual budget speech of 2014 notified REITs regulations on September 26, 2014. 

Reits typically offer the following benefits:- 

•  For the Investors:- REITs as an investment class provide the common man an opportunity to invest in fixed income securities which also provide long term capital appreciation and a natural inflation hedge. It also opens to small investors an arena (i.e rent generating real estate assets) which was hitherto the monopoly of large investors. 

• v For the Industry:- REITs assist in streamlining the real estate sector by creating a new and transparent source of raising finance in the real estate sector. Further, REITs can provide developers with institutional capital to sell their assets and use funds to repay banks and/or utilize the funds for more development. 

Key features of SEBI(Real Estate Investment Trusts) Regulations, 2014 

a) REITs shall be set up as a trust and registered with SEBI. It shall have parties such as Trustee, Sponsor(s) and Manager. 

b) The trustee of a REIT shall be a SEBI registered debenture trustee who is not an associate of the Sponsor/manager.

a) REIT shall invest in commercial real estate assets, either directly or through SPVs. Now investment through holding co. is allowed.

b) Once registered, the REIT shall raise funds through an initial offer. Subsequent raising of funds may be through follow-on offer, rights issue, qualified institutional placement, etc.

c) Units of REITs shall be mandatorily listed on a recognized Stock Exchange and REIT shall make continuous disclosures in terms of the listing agreement. Trading lot for such units shall be ` 1 Lakh.

d) For coming out with an initial offer, the value of the assets owned/proposed to be owned by REIT shall be of value not less than ` 500 crore. Further, minimum issue size for initial offer shall be ` 250 crore.

e) The Trustee shall generally have an overseeing role in the activity of the REIT. The manager shall assume operational responsibilities pertaining to the REIT. Responsibilities of the parties involved are enumerated in the Regulations.

f) A REIT may have multiple sponsors, not more than 3, subject to each holding at least 5% of the units of the REIT. Such sponsors shall collectively hold not less than 25% of the units of the REIT for a period of not less than 3 years from the date of listing. After 3 years, the sponsors, collectively, shall hold minimum 15% of the units of REIT, throughout the life of the REIT.

g) Not less than 80% of the value of the REIT assets shall be in completed and revenue generating properties.

h) Not more than 20% of the value of REIT assets shall be invested in following :

i. developmental properties,

ii. mortgage backed securities,

iii. listed/ unlisted debt of companies/body corporate in real estate sector,

iv. equity shares of companies listed on a recognized stock exchange in India which derive not less than 75% of their operating income from Real Estate activity,

v. government securities,

vi. money market instruments or Cash equivalents.

However investments in developmental properties shall be restricted to 10% of the value of the REIT assets.

REIT shall distribute not less than 90% of the net distributable cash flows, subject to applicable laws, to its investors, atleast on a half yearly basis.

a) REIT, through a valuer, shall undertake full valuation on a yearly basis and updation of the same on a half yearly basis and declare NAV within 15 days from the date of such valuation/updation. 

b) The borrowings and deferred payments of the REIT at a consolidated level shall not exceed 49% of the value of the REIT assets. In case such borrowings/ deferred payments exceed 25%, approval from unit holders and credit rating shall be required. 

c) Detailed provisions regarding related party transactions. valuation of assets, disclosure requirements, rights of unit holders, etc. are provided in the Regulations. However, for any issue requiring unit holders’ approval, voting by a person who is a related party in such transaction as well as its associates shall not be considered.