MUMBAI: The market regulator SEBI has introduced draft regulations related to Real Estate Investment Trusts (REIT). This revives an earlier proposal in 2008 which was not implemented because of difficulties in valuation and reporting of net asset value periodically.
A market expert said the proposal has been revived with a view to reverse the flow of capital from other REIT markets, particularly Singapore.
Beneficial Both ways
At present, foreign REITs involve offshoring of ownership of assets and capital markets outside India.
REITs are beneficial to both investors and the real estate industry. On the one hand, it provides an exit route for the developer/industry and for the investors it gives an opportunity to invest in properties which they would not have normally been able to take an exposure to.
According to the draft regulations, REITs may raise money from investors, resident or foreign, but initially the units may be offered only to high net worth individuals (HNI) and institutions.
However, participation of foreign direct investment and foreign portfolio investors in REITs will depend on necessary clarifications in the FDI policy and also consultations with the RBI.
The minimum subscription per investor will be Rs 2 lakh and every unit will be of the size of Rs 1 lakh. REIT will have a structure similar to that of a mutual fund. The vehicle of the REIT will be a trust and it will have trustees registered with SEBI, sponsor, manager and principal valuer. The fully developed real estate (completed revenue generating real estate assets) will vest in the trust. The REIT will not invest in vacant or agricultural land.
To ensure regular income, at least 90 per cent of the net distributable income after tax of the REIT (rent) will be distributed to the investors. A REIT can invest directly in real estate or in a special purpose vehicle or company holding not less than 90 per cent of its assets in such properties.
The minimum size of investment that the REIT can hold is Rs 1,000 crore. Listing is mandatory for the units. The minimum initial offer size is Rs 250 crore and the minimum public float 25 per cent. To avoid excessive leverage, the consolidated borrowings and deferred payments of the REIT have been capped at 50 per cent of the value of its assets. If the leverage exceeds 25 per cent, the REIT will require credit rating and approval of majority of investors.
Physical inspection is mandatory at least once a year but valuation and NAV should be declared at least twice a year. Investors have the right to remove trustees through SEBI, besides having the right to remove the auditors, principal valuer and manager. They can also seek delisting of units.
A tax expert said unlike a mutual fund trust, the REIT will be subject to tax. There is no clarity on whether there will be a withholding tax on the net distributable income, he said. This may affect the earnings of the investor. This compares unfavourably with the situation prevailing abroad where there is a marginal levy.
To develop depth of the market and increased liquidity, tax concessions and incentives (obtaining in foreign REIT markets) may be necessary to serve the desired purpose of reversing capital flows, the expert said.