When we discuss about investment instruments in today’s world, Real Estate frequently finds the top place in the list. Everyone acknowledges, without any confusion, that investment in Real Estate never depreciates; it sees only appreciation, the extent of appreciation may depend on few factors. However, this top rated asset class and investment instrument is not very easily accessible for general investors, because it is not always feasible to buy real estate properties directly. In stock Market, the stocks which we generally call as “Realty” or “Real Estate”, those are actually construction companies and investment in those stocks is not equivalent to investment in real estate. Therefore, an instrument, like mutual funds, where the fund is invested in Real Estate, will be suitable for retail investors. This gap is going to be filled by the new Investment Instrument, REIT i.e, Real Estate Investment Trust. There is no doubt that it will open a new horizon for the investors.
What is REIT?
A Real Estate Investment Trust is a company that owns or finances income producing real estate. Created on the basic principles of Mutual Funds, REITs will pool money from investors and issue units to them. They will then invest the money in income-generating (rental) assets offering the retail investors a way to diversify their portfolios by investing in property. The units will then be listed on an exchange for buying and selling.
This instrument provides anyone the opportunity to invest in large scale properties just like they invest in various industries through purchase of stocks. Just like investors receive dividends and other benefits, unit holders of REIT will earn a share of the income produced properties without actually buying a property.
REITS in India
Throughout the world, Real estate investment trusts (REITs) have been one of the most important vehicles for making pooled investment in commercial real estate. Originating in the USA in 1960s as a tax transparent collective investment vehicle, REITs have been adopted by several other countries, and have done remarkably well. Commercial property owners are enthusiastic of REITs as they can now hold expensive properties by leveraging on instruments like commercial mortgage backed securities.
REIT has been discussed in India for several years however it never took off as an investment instrument. Based on the recommendations of AMFI Committee, SEBI introduced real estate mutual funds and also came up with a draft regulation on REITs in 2008. In 2013, another regulatory framework was formulated which showed signs of REITs to be considered as serious investments.
Budget 2014 had introduced amendments in the Income-tax Act 1961 to grant tax transparency to REITs, with a part of the income taxable in the hands of investors, and not in the hands of the fund, and another part taxable in the hands of the fund, but not the investors. Tax provisions and the structure of REITs in India vary significantly from those in the US. In the US, REITs usually hold properties, but in India, REITs may be holding securities of SPVs, which may ultimately hold properties. Unlike the international model, Indian law does not link tax benefits to REITs to distribution of income by the REIT.
Despite these facts REITs are now ready to make an impression in India. With excessive focus on developing smart cities and commercial real estate by the present government, India has a vast potential for REITs that will attract both domestic and international investors.
Overview of REITS regulation by SEBI- the governing body
| Structure | · Set up as a Trust under Indian Trusts Act, 1882 and registered with SEBI · Relevant parties- Trustee , Sponsor and Manager |
| Eligible Investors | · Residents as well as foreign investors · Minimum subscription size- Rs 2 Lakhs per investor · Unit Size- Rs 1 Lakh · Minimum 200 investors |
| Sponsors | · Can have maximum 3 sponsors, each holding minimum 5% units. · Sponsors, together, should have minimum net worth of Rs 200 million · Collectively hold not less than 25% of the units for a lock-in period of 3 years from the date of listing · After 3 years, required to hold 15% collectively throughout the life of REITs · Sponsors/ its Associates should have minimum 5 years of experience in real estate industry on an individual basis |
| Trustee | · Should be a SEBI registered Debenture Trustee and should not be an associate of Sponsor/ Manager. |
| Manager | · Minimum net worth of Rs 100 million · Have atleast 5 years of relevant experience |
| Listing requirement | · Mandatory |
| Investment conditions | · Invest only in properties or securities in India · At least 80% of the value of the REIT assets needs to be in completed and rent generating properties · Prohibited to invest in vacant and agricultural lands · Allowed to invest in properties through a SPV, subject to certain conditions · Remaining 20% can be invested in o Developmental properties (restricted to 10% of the value of the REIT assets) o Listed or unlisted debt of companies/ body corporate in real estate sector; o Mortgage backed securities; o Equity shares of companies listed on a recognized stock exchange in India which derive not less than 75% of their operating incomefrom Real Estate activity; o Government securities; o Money market instruments or Cash equivalents |
| Income & Dividend | · Atleast 75% revenue to be from rental, leasing and letting real estate assets at all times · Atleast 90% of the net distributable cash flow to be distributed among unit holders |
Recently, on 30th April 2015, while delivering a speech on Budget in the Lok Sabha, Finance Minister proposed exemption of MAT on gains and losses arising from the exchange of shares with the units of a business trust REIT. He announced that Minimum Alternate Tax would be applicable on the real estate and infrastructure investment trusts only when there is actual transfer of their units. The announcement would provide relief to realty players who are planning to launch Real Estate Investment Trusts (REITs) for monetising their commercial assets. Further, there is huge scope for big inflow of Domestic as well as Foreign Funds into this new generation Investment Instrument.
