Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs)

To increase the investor-base and open up another financing avenue for real estate developers, the Securities and Exchange Board of India (SEBI) considered allowing Real Estate Investment Trusts (REITs) in India. The initial draft on regulation this effect was shaped in 2008, but subsequently the regulator withdrew it due to non-transparent valuation norms, dissimilar stamp duty structure across different states and the lack of uniformity in land and property pricing. Later in October 2013, SEBI revived the plan by issuing draft regulations for launching REITs in the country; and now recently the regulator has issued final guidelines for REITs. 

The  guidelines broadly for REITs

Specifics

Guidelines

Set up as

Trust

Registration with

SEBI

Investments by REITs

Should be in commercial real estate, directly or via Special Purpose Vehicles (SPVs)

Controlling Interest

For REITs: Not less than 50% of the equity share capital or interest For SPVs: It cannot hold less than 80% of its assets in properties and shall not invest in other SPVs

Minimum project investment

Shall invest at least 2 projects with not more than 60% of the value in assets invested in one project

Other investment related guidelines

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

·         Not more than 20% of REIT assets shall be invested in:

·         developmental projects

·         mortgaged backed securities

·         listed / unlisted debt of companies / body corporates in the real estate sector

·         equity shares of companies listed on the recognizes stock exchange in India which derive not less than 75% of the operating income from real estate activity

·         government securities

·         money market instruments or cash equivalents

Distribution of earnings

Shall not distribute less than 90% of net distributable cash flows, subject to applicable laws, to its investors, at least on a half-yearly basis.

Borrowing and deferred payments of REIT

At a consolidated level borrowing / deferred payment shall not exceed 49% of the value of the REIT assets. In case borrowings / deferred payments exceed 25%, approval from unit holders and credit rating shall be required.

Valuation of REIT

Through a valuer on a yearly basis and update the same on a half-yearly basis

Declaration of NAV

Declare NAV within 15 days from the date of valuation / updation

Minimum value of assets that REITs must have to float an initial offer

Rs 500 crore

Minimum size of the initial offer

Rs 250 crore. Also, the units offered to the public in initial offer shall not be less than 25% of the number of units of the REIT on post-issue basis.

Minimum subscription size for units of REITs

Rs 2 lakh

Trading lots for units

Shall be in Rs 1 lakh

Listing

On a recognized stock exchange

Disclosure norms

As per terms of the listing agreement

Sponsors

May have multiple but 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.

 

REITs investment norms not yet finalized, clarity required on lot of points.  Wait for the final notification and guidelines      (10-Aug-2014).  

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