The focus of REIT in India will be on completed revenue generating properties and less exposure to mortgage backed securities. Atleast 75% of the revenues of the REIT shall be from rental, leasing and letting real estate assets at all times. Minimum subscription size shall be Rs2 lakh
A draft paper on Real Estate Investment Trusts (REIT) by the Securities and Exchange Board of India (SEBI) permits real estate funds, which will invest in completed and revenue generating real estate. Find out the details of the new investment opportunity. REIT in India will be different from the US REITs.
On 10 October 2013, SEBI issued a draft Real Estate Investment Trusts (REITs) Regulations, 2013. A REIT is a pooled investment entity registered with SEBI, just like a mutual fund with investment primarily in real estate of completed and revenue-generating properties. The rental received from these properties will be distributed among investors as dividend. Real estate is a big ticket investment with a huge chuck of money getting locked in buying a property. The advantage of REIT is availability of exposure to real estate with a smaller ticket size as well as diversification of investment by REIT.
There are many differences in the REIT that will be offered in India when compared to already available REIT in US.
Where will REIT invest?
India: It has been mandated that at least 90% of the value of the REIT assets shall be in completed revenue generating properties. In order to provide flexibility, it has been allowed to invest the remaining 10% in other assets as specified in the proposed Regulations. E.g. developmental properties, listed or unlisted debt of companies, mortgage backed securities, equity shares of companies deriving not less than 75% revenue from real estate activities, government securities, money market or cash.
US: Invest at least 75% of its total assets in real estate assets and cash; Have no more than 25% of its assets consist of non-qualifying securities or stock in taxable REIT subsidiaries.
Shareholder pattern
India: It has been specified that the size of the assets under the REIT shall not be less than Rs1,000 crore. Minimum initial offer size of Rs250 crore and minimum public float of 25% is specified to ensure adequate public participation and float the units. The REIT may raise funds from any investors, resident or foreign. Only for HNI - Minimum subscription size shall be Rs2 lakh and the unit size shall be Rs1 lakh.
US: Minimum of 100 shareholders after its first year as a REIT; No more than 50% of its shares held by five or fewer individuals during the last half of the taxable year.
Type of REITs
India: It has been mandated that at least 90% of the value of the REIT assets shall be in completed revenue generating properties. No REIT will be allowed to invest in vacant or agricultural land or mortgages other than mortgage-backed securities. Further, a REIT can invest its entire corpus in one project only if the size of the asset is at least Rs1,000 crore.
US: REITs generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs. Most REITs are equity REITs. Equity REITs typically own and operate income-producing real estate. Mortgage REITs, on the other hand, provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities. Mortgage REITs tend to be more leveraged (that is, they use a lot of borrowed capital) than equity REITs.
REIT Income
India: Not less than 75% of the revenues of the REIT other than gains arising from disposal of properties shall be from rental, leasing and letting real estate assets at all times.
US: Derive at least 75% of gross income from rents or mortgage interest.
Distribution of REIT Income
India: To ensure regular income to the investors, it has been mandated to distribute at least 90% of the net distributable income after tax of the REIT to the investors.
US: Must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.
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