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REITs: The Final Cut!

Published on Mon, Aug 18,2014 | 22:20, Updated at Mon, Aug 18 at 22:20Source : Moneycontrol.com 

By: Neeraj Bansal, Partner & Head, Real Estate & Construction Sector, KPMG

SEBI approved the SEBI (Real Estate Investment Trusts) Regulations, 2014 in its meeting on 10 August 2014. Though the final guidelines are yet to be notified, SEBI in its press release mentioned the salient features of the REIT regulations as approved by the Board.

Various representations which have been accepted by SEBI and the likely positive impact therefrom has been discussed herein below:

1. The minimum asset size of REIT has been reduced from INR 1000 crores to INR 500 crores. This will allow more developers to enter the REIT market and create liquidity. Furthermore, this would also mean larger number of REITs for investors to choose for making an investment decision.

2. Investment norms in assets other than completed and revenue generating assets (i.e. developmental properties, mortgage backed securities, listed or unlisted debt of real estate companies, equity shares of real estate companies, government securities and money market instruments) has been increased from 10 percent to 20 percent. Further, within the cap of 20 percent, REIT can invest in developmental properties up to 10 percent. This certainly is a positive change and would facilitate REIT managers to adopt diversified portfolio investment strategy. On a similar note, the SPV is also required to have atleast 80 percent of its assets directly invested into eligible real estate projects.

3. As opposed to condition of having solo sponsor in the draft regulations, the final REIT regulations shall allow maximum of 3 co-sponsors subject to each holding atleast 5 percent of the units of REIT and cumulatively, holding not less than 25 percent of the units of REIT for a period of atleast 3 years from the date of listing. Allowing multiple sponsors in REIT will generate larger and broad based participation, since it will allow real estate developers to join hands and propose a REIT to liquidate their eligible real estate properties.

4. REIT shall invest in atleast 2 projects with not more than 60 percent of value of assets invested in one project. This restriction is aimed at safeguarding the investor’s interest from possible risk arising from investment by REIT in single project. However, the change may deter developer’s ability to raise funds.

5. REIT will initially raise funds through a public offer and subsequently through follow-on offers, rights issue, qualified institutional placement, etc. The minimum subscription size for the units of REIT and trading lots of units have remain unchanged at INR 2 lakhs and INR 1 lakhs respectively. By keeping large subscription size, SEBI intends to allow only big investors to access the REIT market, before the REIT market matures.

SEBI has considered many significant suggestions presented by the sector players. However, there exists some representations which at this point in time is not clear whether have been accepted by SEBI. Key ones are detailed below:


1. The experience of Sponsor to be widened to include players with more than 5 years experience in fund management / advisory services / property management services in the real estate sector. This change would allow the fund managers, private equity houses and non real estate developers with rental earning assets (such as warehouses, hotels, etc) to act as Sponsors.

2. Minimum experience norms (i.e. 5 years) for Manager of REIT to be been relaxed to allow new entity with promoters / employees having the requisite experiences to act as Manager.

3. The Manager and the SPV holding real estate assets to be allowed to use Limited Liability Partnership entity form. Considering the fact that SPV under InvIT Regulations include an LLP entity form, similar change should be made in REIT regulations.

4. 20 percent cap on leasing to related parties to be relaxed which could permit sale and lease back, with appropriate safeguards to protect investor’s interest.
One will have to wait for the final regulations to be released to find out precisely whether the above mentioned expectations have also been considered or not. Approval of REIT regulations by SEBI is a positive move and will certainly pave way in making REIT a realty. It is estimated that India has close to 400 million sq ft of commercial office space of which about 100 million sq ft is ready to be let out. It is estimated that Indian commercial real estate which is REIT compliant is worth USD10-20 billion. In order to provide conducive environment for growth of REIT structure in India, it is necessary that representation of the sector players are considered favorably and approval of REIT regulations post public consultation by SEBI is certainly a step in the right direction.

(Nirmal Nagda and Digesh Shah, Chartered Accountants, KPMG also contributed to this article)

 
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