DELHI: The Securities and Exchange Board of India (SEBI) recently initiated steps to revive the Real Estate Investment Trusts (REITs).
A REIT is a company or a group that owns and manages real estate on behalf of investors. REITs are beneficial to both investors and the real estate industry. The objective of a REIT is to organize, operate and manage collective investments in real estate. This will increase the depth of India’s real estate market, in terms of exit and financing options for developers and avenues for investors.
To launch REIT schemes, these trusts will have to float a real estate investment management company. A REIT is a pooled investment entity, much like a mutual fund. A REIT will have trustees, sponsors, managers, and a principal valuer. A trust, once formed, will initially apply for a SEBI registration and once the market regulator grants the REIT approval, it will be allowed to offer units to the public and get the units listed. Once listed, a REIT may subsequently raise funds through follow-on offers. Listing of units will be mandatory for all REITs.
All REIT schemes 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.
To float an initial offer of REIT units, the size of assets under the REIT will have to be at least Rs 1,000 crore. This will ensure that initially only large assets and established entities enter the market. Further, the minimum initial offer size has to be Rs 250 crore, in which the public float has to be at least 25%. REITs will invest primarily in real estate mostly in completed, revenue generating real estate. The rental received from these properties will be distributed among investors as dividend.
Real estate requires a heavy investment. By investing through REITs, investors will be able to gain exposure to real estate with a smaller in vestment. REITs are required to be set up as a trust. It indirectly holds real estate. The real estate is housed in a special purpose vehicle (SPV) and in come then flows to the trust, which holds the SPV. As such, it can diversify across locations and types of real estate, like offices, warehouses, and shopping malls. Such diversification will reduce risk. Further, as REITs will have professional managers, they will be managed by experts.
SEBI has suggested a minimum unit size of Rs 1 lakh and a minimum subscription size of Rs 2 lakh. As such, investors get an exposure to real estate through REITs, thereby diversifying their portfolios beyond equity and debt. REITs will enable investors to invest in the realty sector through a regulated network.
Moreover, as REITs will invest primarily in built-up property, the investor will not have to bear development risks.
The units issued by REITs will be listed on stock exchanges. So, whenever an investor wants to exit, he will be able to sell his units on the exchange. This will bring about liquidity in the investments. Further, REITs will provide an additional and transparent source of funding to the realty sector.
REITs suit investors seeking a regular income from their portfolio. Investors in REITs may expect stabilized returns on their investments, and appreciation in market value of assets in a regulated and transparent environment.
To ensure regular income for investors, SEBI has proposed to make it mandatory for the trusts to distribute at least 90% of the net distributable income after tax to investors.
They have to invest primarily in completed revenue generating properties. At least 90% of a REITs’ assets should be invested in completed and revenue-generating properties. The balance 10% can be parked in other assets.
In order to ensure that underlying assets of REITs are valued accurately, a full valuation including a physical inspection of the properties has to be made at least once a year, and be updated every six months. Accordingly, the net asset value of REIT units will be declared at least twice a year. While purchasing a new property or selling an existing property, the value of the transaction cannot be less than 90% of the assessed value of the property while selling or more than 110% while purchasing.
It will create opportunities for developers to exit commercial real estate projects and will create a new investment vehicle through which smaller investors can gain exposure to income-generating real estate assets. REITs are beneficial to investors as well as to the real estate industry.