On August 10, 2014, real
estate sector received a KICK to boost up the cash strapped industry a new
route to tap capital with the approval of setting up of Real Estate Investment
Trusts(REITs) by SEBI, market regulator.
What is REIT?
RE-
Real Estate
|
To
construct homes, offices, townships
|
I-
Investment
|
All
investors are welcome
|
T-Trust
|
Operated
by professional managers (similar to mutual fund managers)
|
REIT
is an investment pool, which finds alternative means of financing real estate
through an initial public offering (IPO), which is then used to buy, develop,
manage and sell assets in real estate. This pool of real estate generates
income through renting, leasing and selling of property and distributes it
directly to the REIT holder on a regular basis.
REITs can be viewed as
mutual funds that invest in real estate properties and/or mortgages instead of
securities such as bonds and shares. REITs are financial intermediaries
specializing in real estate investments and channel funds from the financial
markets to the real estate sector. REITs raise the funds required through issue
of shares, borrowings from institutions such as banks and insurance companies
and issue a variety of debt instruments.
A major benefit of REITs is that they do not have to pay tax on the
income received by them, as 90% of the income is distributed to the
shareholders. This distributed income is taxed only in the hands of the
shareholders and double taxation is avoided. Smaller real estate investors are
offered certain important qualities through the modem REITs, which previously
were never accessible and available to them before:
- Liquidity: The greatest advantage that REITs have in comparison
to other forms of real estate investment is the liquidity of the
investment. REITs have helped turn real estate liquid. Shares of publicly
traded REITs traded on the major stock exchanges. Illiquidity, the bane of
real estate investors, is gone.
- Security: The security lies in the requirement that REITs pay
out 90% of their income. The hefty dividends provide a cushion when the
market falls.
- Performance: Since their inception, REITs have provided
competitive investment performance. REIT market performance has exceeded
returns on fixed debt instruments or direct investment in real estate.
- Current income: REITs annually pay out almost all their taxable
income; a significant component of total return reliably comes from
dividends.
- Professional management: REIT managers are skilled,
experienced real estate professionals.
- Portfolio diversification: REITs let conservative
investors add real estate to their portfolios without taking huge risks.
Types of REITs
- Equity REIT Fund - It specializes in property ownership. By directly
owning, investing in or acquiring, managing, or developing real property.
An equity RE fund derives its regular revenue primarily from income
generated by rental and lease payments. An equity RE fund can benefit from
appreciation in its underlying real properties; its income can grow
through increases in rents from such properties; and cash in excess of
taxable income can be produced through property depreciation.
- Mortgage REIT Fund - It concentrates on financing
activities. A mortgage RE fund invests in the mortgages, mortgage-backed
securitization and whole or sub prime loans, or portions thereof, on real
property assets. In essence, mortgage RE funds loan money to real estate
owners and such RE funds generate their revenue from the interest earned
on such loans.
- Hybrid REIT Fund - As the name suggests, owns a combination of equity
and mortgage interests in properties.
· Finite Life REIT Fund - It sets forth in
the offering documents for its securities a termination date (seven to fifteen
years from the RE fund’s date of inception) and an investment strategy.
- Special Purpose or Dedicated REIT Fund - It invests in a single type of
property and may be tied to a particular developer or user of real estate.
Certain RE funds invest in a variety of property types (e.g., apartments,
hotels, self storage facilities, restaurants, golf courses, office
building).
Structure
of REIT
REITs in India are required to be set up as private trusts
under the purview of the Indian Trusts Act, 1882 and trust deed shall be registered under the
provisions of the Registration Act, 1908
- Parties: The parties in the REIT include
the sponsor, the manager, the trustee, the principal valuer and the
investors / unit holders. Sponsor sets up the REIT, which is managed by
the manager. The trustee holds the property in its name on behalf of the
investors. The roles, responsibilities, minimum eligibility criteria and
qualification requirements for each of the abovementioned parties are
detailed in the Regulations. Sponsors are required to hold a minimum of
15% (25% for the first 3 years) of the total outstanding units of the REIT
at all times to demonstrate skin-in-the-game.
- Use of SPV: REITs may hold assets directly
or through an SPV. All entities in which REITs control majority interest
qualify as an SPV for the purpose of the Regulations.
- Investment and
Listing: Units
of a REIT are compulsorily required to be listed on a recognized stock
exchange.
- Potential income streams: REITs are principally expected
to invest in completed assets. Income would consist of rental income,
interest income or capital gains arising from sale of real assets / shares
of SPV.
- Distribution: 90% of net distributable income after tax of the REIT is required to be distributed to unit holders within 15 days of declaration.
Raising of Funds and Listing
of Securities of REIT
The
trust shall be registered with SEBI post which it can raise funds through an
initial offer and once listed, may subsequently raise funds through follow-on
offers. The value of REIT assets shall not be less than INR 500 Crores. This is
to ensure that only established players enter the market. The minimum initial
offer size and minimum public float of INR 250 crore and of 25% respectively
has been specified in order to ensure adequate public participation and float
in the units. Further, minimum size of one unit of REIT shall be INR 1 lakh and
minimum subscription size shall be INR 2 lakhs. It shall be mandatory for all
units of REIT to be listed on the exchanges and shall continue to be listed on
the exchange unless delisted under the Draft Regulations. Further, the funds
may be raised by REITs from resident or foreign investors.
Investment Conditions and
Dividend Policy
It
has been mandated that 80% of the value of the REIT assets shall be in
completed and rent generating properties and 20% can be invested in other
assets as specified under the Draft Regulations. The investment by a REIT shall
only be in assets in India. The REITs are not permitted to invest in vacant
land/ agricultural land/ mortgages other than mortgage backed securities. REITs
have been allowed to invest in properties directly or through a SPV. REIT shall
invest in at least 2 projects with not more than 60% of the value of assets
invested in one project. Further, to ensure regular income to the investors, it
has been mandated to distribute 90% of the net distributable income after tax
of the REIT to the investors at least on a half yearly basis.
For
further details or clarification on REITs, contact us at admin@equicorplegal.com /+919958709189
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