To infuse liquidity in the real estate sector and provide more funding options to debt-laden developers, SEBI, for the second time, released a consultation paper and draft regulations (“Draft Regulations”) on Real Estate Investment Trusts (“REITs”).
The Draft Regulations prescribe that REITs would be structured as trusts, to be registered with SEBI and would mandatorily be required to list their units on stock exchanges. To ensure serious players set up REITs, the minimum value of assets to establish a REIT has been proposed at Rs. 1000 crore. Further, for retail participation, the minimum subscription amount has been kept at Rs. 2 lakh per investor as opposed to Alternative Investment Funds, where the minimum subscription amount is Rs. 1 crore. The Draft Regulations require 90% of the REIT assets to be invested in “completed and rent generating properties”. A property would be considered as “rent generating” only if 75% of its area is rented or leased out. REITs are not permitted to invest in vacant land, agricultural land and mortgages.
REITs are investment vehicles which provide real estate developers with an exit opportunity for their completed commercial projects. The developers may use REITs to offload their stakes in such projects and utilize the proceeds to pay off creditors or towards funding fresh development. Further, listed units of REITs may be attractive investment options for investors who desire stable return from rental accruals and seek appreciation of value of immoveable property.
However, implementation of REIT structure in India will have to encounter some regulatory challenges like; (a) incidence of double taxation of investors and the trust; (b) exchange control restrictions for investment in REITs (currently foreign investment in Indian trusts require prior approval of the FIPB), and; (c) legal uncertainties in relation to transfer of property to the REIT and winding up of such REITs. A favourable resolution of the above challenges would develop the REIT market in India.