The SEBI Board has cleared the final guidelines for setting up
REITs. Announcing the final guidelines for REITs, SEBI has set the ball rolling
for product manufacturers to launch their product to be subscribed by investors
with a minimum investment of Rs 2 lakh.
While the concept of REITs been in existence in developed markets
for several years now, it is a new concept in India and investors need to know
what it is and how it works before they invest in them.
What are REITs
They are investment trusts that operate much like mutual funds. While
mutual funds invest in equities, debt instruments, REITs invest in real estate.
So then, REITs pool money from investors and invest the same in real estate. For
investors who wish to allocate money to real estate, this is an option as one
can own a piece of a prime / income generating property for a modest sum. Otherwise,
an investment in developed property is
difficult for small investors.
REITs, as per the guidelines, should invest primarily in income generating real estate assets —
commercial or residential and thereby look to generate regular return for investors.
The regulations aim to make investment
in real estate through REITs less risky as investments are in developed
properties that provide regular income.
REITs abroad are a popular investment option for long term pools
of capital such as pension funds and insurance companies due to the regular stream of income which helps them in managing regular outflow to their
investors.
The Proposed Framework in regulations
1. REITs will be set up as a Trust (similar to mutual funds) and will have parties such as trustee
(registered with SEBI), sponsor, manager and principal valuer with specific
responsibilities.
2. After the registration, the REIT would raise funds through an
initial offer from investors and get listed. The minimum issue size of the
initial offer to the public has been specified at Rs 250 crore and the regulator
has specified that the size of assets under the REITs should not be less than
Rs 500 crore.
3. The regulator has said that till the market develops, the units
of REITs may be offered only to HNIs/institutions and therefore, the minimum
subscription size has been kept at Rs 2 lakh
4. The units offered to
the public in initial offer shall not be less than 25% of the number of units
of the REIT on post-issue basis
5 .Units of REITs shall
be mandatorily listed on a recognized Stock Exchange and the REIT shall make
continuous disclosures in terms of the listing agreement. Trading lot for such
units on stock exchanges shall be Rs 1 Lakh.
6. In India REITs will invest in commercial real estate assets,
either directly or through Special Purpose Vehicles (SPVs). In such SPVs a REIT
shall hold controlling interest and not less than 50 per cent of the equity
share capital or interest.
7. Not less than 80% of
the value of the REIT assets shall be in completed and revenue generating
properties. Not more than 20% of the value of REIT assets shall be invested in
following :
i.
developmental
properties( restricted to 10% of the value of REIT assets),
ii.
mortgage backed
securities,
iii.
listed/ unlisted debt
of companies/body corporates in real estate sector,
iv.
equity shares of
companies listed on a recognized stock exchange in India which derive not less
than 75% of their operating income from Real Estate activity,
v.
government securities,
vi.
money market
instruments or Cash equivalents.
8. A REIT should invest
in at least 2 projects with not more than 60% of value of assets invested in
one project and should distribute not
less than 90% of the net distributable cash flows, to its investors, at least
on a half yearly basis.
9. REITs, through valuers, should undertake full valuation on a
yearly basis and update the same on a half yearly basis and declare NAV within
15 days from the date of such valuation/updation.
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