SEBI Issues Consultation Paper On Draft REIT Regulations

After long time the real estate sector witnessed positive news flow as SEBI issued a Consultation Paper on Draft guidelines for Real Estate Investment Trust (REIT).  After withdrawing it around five years back in 2008, this issuance of guidelines are likely to provide much needed source of funds to the debt laden realty companies.REIT is an investment vehicle that invests into real estate assets to generate income, which is passed on to investors. Just like a stock, a REIT unit is listed and traded on a stock exchange.

The guidelines are a clear set of indication to allow entities to do business in India. The regulation clearly suggests that REITs will have to be registered as trusts with SEBI which will have to be floated as a real estate investment management company. REIT will be allowed to raise funds through an initial offer for which it will be mandatory for them to have an asset size of not less than Rs 1000 crore. Further, minimum initial offer size of Rs 250 crore and minimum public float of 25 percent is specified to ensure adequate public participation and float in the units. The REIT may raise funds from any investors, resident or foreign.

However, initially, till the market develops, it is proposed that the units of the REITs may be offered only to HNIs/institutions and therefore, it is proposed that the minimum subscription size shall be Rs. 2 lakh and the unit size shall be Rs. 1 lakh.

Apart From this the SEBI has laid down the responsibilities of the Trustee and REIT Manager. It has also provided its views on investment conditions and dividend policy.

Criteria for investment remain intact from last draft: 

• 90% of the investment must be done in 'completed' revenue-generating properties
• The remaining 10% can be invested in other assets as deemed fit by the REIT manager
• There will be no investment by REITs in vacant or agricultural land
•  90% of the net distributable income after tax is to be distributed to investors (the issue of double taxation, as raised by industry participants reacting to the previous draft, still exists)

Here Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India says “These guidelines amplify in some greater detail what was shared in the previous draft. The good news is that the regulator has clearly expressed its willingness to kick-start REITs in India at the earliest. The cautious approach adopted by SEBI during this initial period is acceptable and appreciable. One concern is with regards to the strengthening of our legal framework surrounding real estate in India, which is a pre-requisite for REITs to thrive here. The Real Estate Regulatory Bill, which was approved by the Union Cabinet in June 2013, was therefore a move in the right direction”.

Further, Bhairav Dalal (Associate Director, PwC India) stated “SEBI seem to have taken a very pragmatic approach at the REIT regulations. Lot of emphasis has been given to transparency and disclosures. Indian investors will get an additional investment opportunity to invest in real estate. It will also benefit real estate developers who will be able to transfer their developed assets into a REIT”. 

We feel the companies like DLF, India Bulls Real Estate and Unitech are likely to be major beneficiaries.