Investors who wish to invest in property for the lucrative gains it offers, but do not have sufficient capital to acquire physical real estate assets such as land or buildings now have a market option. Market regulator Securities and Exchange Board of India (SEBI) on Sunday issued the guidelines under which Real Estate Investment Trusts (REITs) will be allowed to operate in India.
An REIT operates a bit like a mutual fund, offering units to investors. The funds are invested in assets owned, and usually operated by the REIT. Investors stand to earn both dividends (from rental income of the property), as well as capital appreciation.
According to the guidelines, investors will have to put in a minimum of ₹2 lakh. The units can be traded on stock exchanges once listed. The trading lot for such units will be ₹1 lakh.
The market regulator’s decision follows Finance Minister Arun Jaitley’s Budget announcement that complete tax pass-through will be available for these two products. This means that the income generated will be taxed in the hands of the investors, and that the fund itself will not have to pay any tax on the same, eliminating the possibility of double taxation.
Any REITs or InvITs entering the market will have to be listed. The minimum initial offer size should be ₹250 crore. They can also borrow additional funds to acquire assets, but the borrowings cannot exceed 49 per cent of the value of the trust’s assets.
REIT norms To popularise REITs, the minimum asset size has been reduced to ₹500 crore from the ₹1,000 crore initially proposed. REITs cannot have more than three sponsors, subject to each holding at least 5 per cent. To ensure that they have enough skin in the game, it has been made mandatory for fund sponsors to jointly hold 25 per cent of REIT units for three years and continue holding 15 per cent thereafter. The new norms will also ensure that excessive leverage is not undertaken through REITs, while the Trustees will be required to be independent and not an associate of the sponsor or manager of the Trust.
The minimum net worth of the manager has been increased to ₹10 crore from the ₹5 crore proposed in the draft norms. At least 80 per cent of the money mobilised by an REIT has to be invested in completed revenue-generating properties, while the rest can be put in developing properties, mortgaged-backed securities, shares of realty and G-secs, among others.
InvIT norms The approved minimum net worth of an InvIT sponsor is ₹100 crore (against the ₹10 crore proposed). The net worth of the investment manager has been doubled to ₹10 crore. For investors. the minimum investment size for InvITs is ₹10 lakh. Those managing the InvIT should mainly be independent directors.
To avoid a conflict of interest, associates of the trustee have been restrained from investing in the InvIT units.
For non-PPP (public-private partnership) projects, credit ratings have not been mandated. The InvITs will invest in infrastructure projects, either directly or through a special purpose vehicle. The proposed holding of an InvIT in underlying assets cannot be less than ₹500 crore. A publicly offered InvIT will need to distribute at least 90 per cent of its net distributable cash flows to investors.