Indian Economy News

REITs get Sebi board’s approval

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  • August 11, 2014

Mumbai: India’s capital market regulator on Sunday approved a long-pending proposal to introduce real estate investment trusts (REITs)—a move that will give cash-strapped developers easier access to funds and create a new investment avenue for institutions and high net-worth individuals, and eventually ordinary investors.

The Securities and Exchange Board of India (Sebi) secured the approval of its board to allow REITs and introduce a separate set of regulations to govern them, six years after it proposed introducing the trusts. The board broadly approved proposals put out in a consultation paper on REITs in October 2013.

The launch of REITs has been delayed partly because of a perception that the taxation structure was unfavourable for investors. In the Union budget announced by the Bharatiya Janata Party (BJP) on 10 July, finance minister Arun Jaitley had said the government was planning friendlier tax norms for REITs and infrastructure investment trusts.

REITs invest primarily in completed, revenue-generating real estate assets and distribute a major part of the earnings among their investors. Typically, the income of these trusts comes from the rentals received from such properties. REITs offer a less risky alternative to investing in under-construction properties and also provide a regular income. To begin with, though, only wealthy individuals or institutions will be allowed to invest in REITs.

The Sebi board’s approval followed a weekend meeting between the finance ministry and the market regulator primarily focused on creation of new investment channels in the real estate and infrastructure sector.

All REIT schemes, to begin with, 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.

REITs, Sebi said, will be allowed to invest in commercial real estate assets, either directly or through special purpose vehicles (SPVs). In such SPVs, a REIT must have a controlling interest of at least 50% of the equity share capital. Further, such SPVs have to hold at least 80% of their assets directly in properties.

REITs will be allowed to raise funds only through an initial offering and units of REITs have to be mandatorily listed on a stock exchange, similar to initial public offering (IPO) and listing for equity shares. An REIT will be required to have assets worth at least Rs.500 crore at the time of an initial offer and the minimum issue size has to be Rs.250 crore.

The minimum subscription size for units of an REIT on offer will be Rs.2 lakh and at least 25% of the units have to be offered to the public.

Subsequently, REITs can raise money through follow-on offers, rights issues or qualified institutional placements and the trading lot for such units will be Rs.1 lakh, Sebi said in a statement.

“Reduction in the asset size to Rs.500 crore will attract more rent-yielding assets under the fold of this vehicle and allowing foreign investments, will attract pension funds and insurance companies, which have been proved as a catalyst of REITs markets globally... Both these can become drivers of growth for REITs in India,” said Neeraj Sharma, partner, Walker Chandiok and Co. Llp, a chartered accountants firm.

According to an estimate by property broker Cushman and Wakefield, the assets that may qualify to be included in REITs may reach $20 billion by 2020, In the first three to five years, as much as $12 billion could be raised.

To help develop the trusts, BSE has set up an 11-member advisory group of experts, bankers, legal professionals and consultants in the real estate industry, according to a statement on 10 July.

The market regulator had said in its October consultation paper that although a REIT may raise funds from any type of investors, resident or foreign, initially only wealthy individuals and institutions will be allowed to subscribe to REIT unit offers.

The market regulator said an REIT may have up to three sponsors, with each holding at least 5% and collectively holding at least 25% for a period of at least three years from the date of listing. Subsequently, the sponsors’ combined holding has to be at least 15% throughout the life of the REIT.

Similar to the practice in the US, Australia, Singapore and other nations where REITs are common, Sebi has decided to allow these trusts to invest primarily in completed revenue-generating properties. To ensure that REITs generate continuous returns, Sebi said at least 80% of the REIT’s assets has to be invested in completed and revenue generating properties.

And, only up to 20% assets can be invested in properties that are being developed, mortgage-backed securities, debt of companies in the real estate sector, equity shares of listed companies that derive at least 75% of their income from real estate, government securities, or money market instruments.

However, no REIT can invest more than 10% in properties that are under construction.

Jitendra Virwani, chairman and managing director, Embassy Property Developments Ltd, said that while many are looking at overseas markets such as Singapore to list, he would look to list his REIT in India.

“There are foreign funds looking to deploy at least a part of their allocation in emerging markets such as India apart from which there are mutual funds, insurance companies that are looking to invest. While Singapore has a currency risk, there are other incentives there,” he said.

Embassy Property, which is planning a $2 billion REIT with global private equity firm Blackstone Group Lp, is planning to list it in India sometime next year.

Virwani said that while in Singapore, the minimum threshold is 90%, the 80% limit in India will help developers in India to bring in under-construction assets as well into REITs.

Sebi said every REIT has to invest at least in two projects, with a maximum of 60% of assets going towards one project. All REITs have to distribute at least 90% of their net distributable cash flows to the investors.

To ensure transparency, Sebi said every REIT has to undergo an yearly valuation and declare its net asset values (NAV) within 15 days of the exercise.

The Sebi board also approved the launch of so-called infrastructure investment trusts (InvITs), which are somewhat similar to REITs. However, an initial offer will not be mandatory for InvITs though listing will be mandatory for both publicly and privately placed InvITs.

The regulator said such trusts can invest in infrastructure projects, either directly or through an SPV. In case of public-private-partnership (PPP) projects, such investments will be only through an SPV.

“In most of the concession agreements in infrastructure projects, 51% of the SPV needs to be held by the promoters who have obtained the approval,” Hemal Mehta, senior director, Deloitte Touche Tohmatsu India Pvt. Ltd, said. “Sebi has now addressed this issue and said that the condition in the concession agreement has certified that InvIT can hold less than 50%, but there has to be a controlled shareholders agreement where a decision is jointly made.”

While listing, the collective holding of sponsors of an InvIT has to be at least 25% for at least three years.

An InvIT will be required to have a holding worth at least Rs.500 crore in the underlying assets, and the initial offer size of the InvIT has to be at least Rs.250 crore.

Executives from GMR Group and Anil Ambani-led Reliance Group, on condition of anonymity, said they will now explore the opportunities of using InvITs.

Sebi said in its statement that any InvIT, which looks to invest at least 80% of its assets in completed and revenue generating infrastructure assets, has to raise funds only through a public issue of units, with a minimum 25% public float and at least 20 investors. Also, the minimum subscription size and trading lot of such a listed InvIT has to be Rs.10 lakh and Rs.5 lakh, respectively.

A publicly offered InvIT may invest the remaining 20% in under construction infrastructure projects and other permissible investments, Sebi said.

An InvIT, which proposes to invest more than 10% of its assets in under-construction infrastructure projects, can raise funds only through private placement from qualified institutional buyers with a minimum investment and trading lot of Rs.1 crore and from at least five investors, where single holding cannot be more than 25%.

Neeraj Bansal, partner and head of real estate and construction at consulting firm KPMG’s India unit, said after the Sebi approval, expediting of notification of REIT and InvIT norms will facilitate the infusion of an estimated $15-20 billion in the sector, and offer an alternative to bank finance.

“With amendments (and) other corresponding regulations, both foreign and domestic institutions and other investors will be eligible to invest in these trusts, and also liquidity to investors (will be ensured) as these trusts will be listed and traded on stock exchanges,” Bansal said.

In a separate development, Sebi also approved single registration for entities willing to act both as stock brokers and clearing members.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

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