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INDIAN REAL ESTATE INVESTMENT TRUSTS
A REALTY BOOSTER
By M H AHSAN / Mumbai
The introduction of Real Estate Investment Trusts will foster construction business in Indian realty. The new year has brought a good news for real estate sector. The Securities and Exchange Board of India (Sebi) has issued draft regulations on Real Estate Investment Trusts (‘REITs’) for public comments. The move will lead to increase in transparency in the sector. It will also help small retail investors to invest in real estate.
The global consultancy firm KPMG said introduction of “Securities and Exchange Board of India (Real Estate Investment Trusts) (Draft) Regulations, 2008” is a welcome move.It is considered to be an essential step in the maturity of real estate market.
In the last five years, real estate market in the country has expanded rapidly due to high economic growth, changing demographics, rising level of foreign investments and rise of a vibrant services sector powered by the IT and IT enabled sectors. The demand for commercial as well as residential space has risen manifold during this period.
In its statement, the market regulator said in this kind of backdrop, REITs play a crucial role, which has emerged as a preferred public property investment vehicle around the world.
The introduction of REIT will stabilize capital access for the sector. Experts feel that this would reduce capital cost. It will bring transparency in the sector and the availability of fund for real estate will also go up.
Globally, REITs are collective investment schemes, mostly organized as unit trusts that invest in income yielding real estate assets with an aim of delivering recurring returns to the investors with a potential for capital appreciation. It provides a similar structure for investors buying into real estate as mutual funds provide for investment in equity market.
The experience, KPMG said, so far in the markets where REITs have been in operation for many years has shown that REITs help in providing retail investors a regulated platform to invest in realty.
“REITs create a healthy secondary market for real estate assets. It helps in circulating equity capital as developers/investors churn assets. It also sets quality standards in terms of acceptable level of investment grade assets andenhances the level of professional property management. “The need for such an instrument was being felt strongly in the market. Many Indian developers were exploring overseas listings through REIT like structures such as business trusts etc,” said KPMG. Further, the credit squeeze by RBI in real estate had also constrained development plans, which resulted in supply shortfalls leading to price rise in many parts of the country.
According to the draft guidelines, REIT will be managed by its trustee, which can be a scheduled bank, trust company, financial institutions, insurance company or a body corporate.However, individuals cannot act as trustee. Schemes of REITs will be managed by real estate investment management companies (REIMCs), which are incorporated in India with the object of organizing, operating and managing real estate investment scheme.
Minimum net worth required by REITs and REIMCs for registration with Sebi will be Rs 3 crore, which, over a period of three years, will be increased to Rs 5 crore. Besides, at least 50% of trustees/directors will be independent and management of REITs and REIMCs will be independent of each other.
REITs can float only close-ended schemes for the purpose of raising funds to invest in income generating real estate properties. But, the units of the scheme will be traded on stock exchange which will enable an investor to exit or enter in the scheme. No scheme will be allowed to give any guarantee on returns to its investors. It will also need to obtain rating from a credit rating agency.
According to the draft guidelines, the scheme can invest mainly in income generating real estate properties. If it invests in partly developed properties, it can do so only up to 20% of its total assets. It can not invest more than 15% in any single real estate project and not more than 25% of all the real estate project developed, marketed, owned or financed by group of companies.
The draft guidelines said, the scheme is prohibited from investing in vacant land or engaging in property development activities. It will be required to distribute at least 90 per cent of its annual net income as dividends each year to the unit holders.
For the valuation of properties held by them, every scheme will have to appoint an independent property valuer. Valuation of property will be undertaken based on valuation standards on properties published by concerned Indian institute. The scheme will disclose its NAV an nually based on the report by the property valuer.
The guidelines has put a restriction on borrowings made by the fund. According to the guidelines, REIT’s borrowing should not exceed 20% of the value of total assets of the scheme. Scheme is allowed to mortgage or pledge its assets to secure such borrowings.
To increase the transparency in the operation of the scheme, the norms have restricted transfer of funds from one scheme to another, except at the time of termination of the scheme with prior approval of the board. At the same time, property of each scheme will be clearly identifiable and held separately from property of the REIMC and any other scheme.
Under the guidelines, REIMC are entitled to an annual percentage - based remuneration from the scheme, which should be stated in the offer document. Incentive fees are currently not contemplated. KPMG said incentive fees are in with some other international REIT model, which should have been adopted here also.
To make the transaction cost effective, Sebi assured to consider effective sale purchase cost of REITS units to partially or completely exempt from the stamp duty, which generally ranges between 5% and 15%.
The launch of REIT will go a long way in maturing the real estate market. It will lead to increase in the construction activities, which, ultimately, benefit the end users.
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