How to Set up a REIT in India

Real estate investment trusts are companies that possess and handle revenue generating real estate across a broad range of property sectors. These investments allow you to earn income from real estate without having to manage, buy or finance properties themselves.

In 1960, REIT was originally formulated under the Cigar Excise Tax Extension Act in the United States. It was first recorded in 1965 on the New York Stock Exchange. In the coming decades, similar instruments emerged in Australia, European, and Japanese stock exchanges.

In the year 2007, the Securities and Exchange Board of India (SEBI) introduced the Real Estate Investment Trusts. The Board’s authorities initially released draft regulations, but it had some limitations due to which it later got rejected. The revised regulations were prepared in September 2013 by SEBI for REIT which got approved in 2014, September 26.

REITs have many benefits for interested investors. It has decreased portfolio unpredictability, wealth accumulation, dividends and wealth and provides regular income stream. Hence, being a registered entity, it is brought and sold easily providing great cash flow. It is a natural barrier against inflation as the cash flow has been consistently outdoing Consumer Price Inflation.

 

Salient features of the REIT Regulations, as approved by SEBI, include the following:

• Structure: Trust under the provisions of the Indian Trusts Act, 1882 and registered with SEBI
• Capital Requirement: Minimum INR 500 Crore
• Listing Requirement: Minimum issue size for initial offer shall be INR 250 crore. Minimum subscription shall be INR 2 lakhs per investor and the trading lot for such units shall be INR 1 lakhs.
• Restriction on Sponsor: REIT can have multiple sponsors but not more than 3, subject to each holding at least 5% of the units of REIT. Sponsors to hold at least 25% of the units of the REIT for a period of at least 3 years from the date of the listing and after 3 years
• Restriction on assets: Minimum 80% of the value of the REIT assets shall be completed and revenue generating properties. Not more than 20 percent of the value of REIT assets shall be invested in mortgage-backed securities, developmental properties, listed/ unlisted debt of companies/body corporates in real estate sector etc. Investment in at least 2 projects with no more than 60% of the value of assets invested in one project.
• Distribution of income: 90% of the net distributable cash flows to be distributed to its investors on a half yearly basis

Trustees

• As per the Trust Deed and these regulations, the Trustee shall hold the REIT assets in the name of the REIT for the utility of the unit holders.
• The Trustee of a REIT shall be a SEBI registered debenture trustee who is not an associate of sponsor or manager.
• The trustee shall have an overseeing role in the activity of the REIT.

Manager

• Experience of at least 5 years in fund management/ property management / advisory services or experience in development of real estate and minimum net worth of five crores.
• There should be 2 Key personnel for the employees of the manager who have a minimum experience of five years in fund management/ property management / advisory services or experience in the development of real estate.

Investment Condition

• REIT shall invest in commercial real estate assets, either directly or through SPVs in such SPVs, a REIT shall hold or propose to hold controlling interest and at least 50% of the equity share capital or interest.
• SPVs shall hold not less than 80% of its assets directly in real estate properties and shall not invest in other SPVs.
• Investment by a REIT to be:
• At least 80% of the REIT assets shall be completed and revenue generating properties.
• REIT asset value investment should not be more than 20% in the following: developmental properties
• mortgage-backed securities
• listed/ unlisted debt of companies/body corporates in real estate sector
• Not less than 75% of the operating income of companies must come from real estate activities. The shares must also be registered with a reputed stock exchange in India.
• government security
• money market instruments or cash equivalents
• Investments in development properties shall be restricted to 10% of the value of the REIT assets.
• REITs have to invest in at least two projects, with no more than 60% of assets invested in a single project.

Valuation

• REIT shall undertake full valuation on a yearly basis and updation of the same on half yearly basis.
• Within the 15 days of updation/valuation, REIT shall declare NAV.

Distribution of Income

• A minimum of 90% of the net distributable cash flows to be distributed to the investors on a half-yearly basis.

Borrowings and deferred payments

• Aggregate consolidated borrowing and deferred payments capped by 49% of value of REIT assets
• Exchange of shares of SPV for units of a business trust is not regarded as taxable transfer. Consequently, taxability is deferred till the time of ultimate disposal of the units by the sponsor.
• At the time of ultimate disposal of the units of the business trust, the sponsor shall not be entitled to avail the concessional STT-based capital gains tax regime.
• The acquisition cost of the units to the sponsor shall be deemed to be the acquisition cost of the shares in the SPV.

 

Additional compliance requirements

The additional compliance needs have been introduced and mentioned below in relation to secretarial audit, submission of compliance certificates and corporate governance reports:

Quarterly compliance report:

Every quarter, it is essential for the board to review compliance reports relating to laws applicable to REITs and the steps taken to revise occurrences of breach. This is required additionally for reviewing quarterly reports on the activity and performance of REIT.

• Secretarial compliance report:

It is issued by a practicing company secretary in a specified format and is needed to be submitted within the 60 days of the end of financial year on annual basis to the stock exchanges. This report is needed to be appended to the annual report of the REIT.

• Quarterly corporate governance report:

This report is needed to be submitted on a quarterly basis within 21 days to the stock exchange when the quarter ends. The report is required to be signed by the chief executive officer or the compliance officer or.

• Compliance certificate:

With reference to the REITs financial statements and internal controls The chief executive officer, compliance officer and chief financial officer are needed to submit a compliance certificate to the board of the investment manager. The certificate’s format is the same as the format prescribed for registered companies under the LODR Regulations.

 

Key Differences Between REITs and InvITs

• Structure and Investment Focus: REITs and InvITs share a similar structure involving a trustee, sponsor, and manager, yet they diverge in their investment focus. REITs concentrate on real estate assets, ensuring at least 80% of their portfolio is invested in completed and income-generating properties like office spaces, malls, and residential complexes. The direction on real estate offers fixed income through rents and leases. Oppositely, InvITs focus on renewable energy assets, and infrastructure projects such as roads and power transmission lines. InvITs also invests in under construction infrastructure projects and revenue generating projects, leading to a stable source of income through usage fees and long-term contracts.

• Revenue Generation and Stability: REITs generate a source of income through small portion of property sales, leasing, and renting properties. This model provides stable income making it less unstable and volatile in compared to InvITs. But they are still subject to market risks and property value fluctuations. InvITs on the other hand create sources of income through, usage fees from infrastructure assets tariffs and tolls. Their revenue streams are more volatile due to regulatory changes, economic conditions and asset related risks such as project failures.