REITs- a trusted step to im­prove Re­alty In­vest­ment

The Se­cu­ri­ties and Ex­change Board of In­dia (SEBI) the set­ting up of real es­tate in­vest­ment trusts (REITs), a move that may of­fer a new source of fi­nanc­ing to In­dia’s cash-strapped prop­erty de­vel­op­ers.

Accommodation Times - - Front Page - By Nimisha Gupta

Real Es­tate In­vest­ment Trust ( REITs) is a se­cu­rity stock which is in­vested and ex­changed in real es­tate di­rectly ei­ther through prop­erty, mort­gage, apart­ments, shop­ping cen­tre, of­fices, ho­tels and ware­houses. It is an as­set class that is cap­i­tal in­ten­sive in­vest­ment. The ori­gin of REITs in United States by Congress in or­der to give all the in­vestors the op­por­tu­nity to in­vest in large scale di­ver­si­fied port­fo­lios of in­come pro­duc­ing real es­tate like how they in­vest in other in­dus­try by the pur­chase of eq­uity. The share­hold­ers will ben­e­fit by own­ing stocks other cor­po­ra­tions, the hold­ers of REITs will earn a ben­e­fit which are de­rived from the in­come gen­er­a­tion. REITs of­fer dis­tinct ad­van­tages for in­vestors: port­fo­lio di­ver­si­fi­ca­tion, strong and re­li­able div­i­dends, liq­uid­ity, solid long-term per­for­mance and trans­parency. REIT in a sim­plest way is real es­tate stock where you can pool your re­sources with other small in­vestors and in­vest in large scale com­mer­cial real es­tate. It of­fers the ben­e­fits of own­er­ship with­out the headache or ex­penses of be­ing a land­lord.

REITs are gen­er­ally clas­si­fied into 3 cat­e­gories i.e. Eq­uity REITs which are in­vested in and own prop­er­ties.

The rev­enue comes prin­ci­pally form their prop­er­ties. Mort­gage REITs deal in in­vest­ment and own­er­ship of prop­erty mort­gages which loan money for mort­gages to own­ers of real es­tate or pur­chase ex­ist­ing mort­gages or mort­gage-backed se­cu­ri­ties. Their rev­enues are gen­er­ated pri­mar­ily by the in­ter­est that they earn on the mort­gage loans and the last one Hy­brid REITs com­bine the in­vest­ment strate­gies of eq­uity REITs and mort­gage REITs by in­vest­ing in both prop­er­ties and mort­gages.

Real Es­tate In­vest­ment Trust re­quires 90% of their tax­able in­come to in­vestors de­pend­ing upon the ex­ter­nal fund­ing as the key sources of cap­i­tal just like other stock of­fer­ings, pub­licly traded REITs col­lect funds via an ini­tial public of­fer­ing (IPO). Those funds are used to buy, de­velop and man­age real es­tate as­sets. The IPO works just like other se­cu­rity of­fer­ings ex­cept that in­stead of pur­chas­ing stock in a sin­gle com­pany, the buyer will own a por­tion of a man­aged pool of real es­tate. In­come is gen­er­ated through rent­ing, leas­ing, or sell­ing the prop­er­ties and is dis­trib­uted di­rectly to the REIT holder on a reg­u­lar ba­sis.

In or­der for a com­pany to qual­ify as a REIT, it must com­ply with cer­tain pro­vi­sions within the In­ter­nal Rev­enue Code. As required by the Tax Code, a REIT must:

• Be an en­tity that is tax­able as a cor­po­ra­tion

• Be man­aged by a board of di­rec­tors or trustees

• Have shares that are fully trans­fer­able

• Have a min­i­mum of 100 share­hold­ers

• Have no more than 50 per­cent of its shares held by five or fewer in­di­vid­u­als dur­ing the last half of the tax­able year

• In­vest at least 75 per­cent of its to­tal as­sets in real es­tate as­sets

• De­rive at least 75 per­cent of its gross in­come from rents from real prop­erty or in­ter­est on mort­gages fi­nanc­ing real prop­erty

• Have no more than 25 per­cent of its as­sets con­sist of stock in tax­able REIT sub­sidiaries

• Pay an­nu­ally at least 90 per­cent of its tax­able in- come in the form of share­holder div­i­dends. With SEBI is­su­ing the fi­nal guide­lines and for the Real Es­tate In­vest­ment Trust (Reits) and In­fra­struc­ture In­vest­ment Trust (In­vITs) – REITs like struc­ture that would al­low de­vel­op­ers to mon­e­tize their in­fra­struc­ture as­sets through a stock ex­change list­ing .The real es­tate sec­tor is likely to get a boost from th­ese moves. Ac­cord­ing to re­search pa­per CRISIL pro­duced the REITs would have the po­ten­tial to hold at least 5% share of the to­tal global real es­tate which pools at least 5 bil­lion ru­pees ($81.78 mil­lion and have an ini­tial is­sue size of at least 2.5 bil­lion ru­pees for share­hold­ers.

Fi­nance Min­is­ter Arun Jait­ley said, the reg­u­la­tor will sim­ply reg­is­tra­tion of stock brokers and clear­ing mem­bers al­low­ing them to ob­tain a uni­fied reg­is­tra­tion for do­ing busi­ness in all stock ex­changes and de­pos­i­to­ries in the coun­try.

Ac­cord­ing to the ex­perts, with Real Es­tate Funds can pos­i­tively im­pact the In­dia Re­alty mar­ket by en­hanc­ing liq­uid­ity through a more broad-based, and wider, par­tic­i­pa­tion of do­mes­tic re­tail in­vestors, In­sti­tu­tion­al­iza­tion, En­hanced com­pe­ti­tion with in­sti­tu­tional in­vestors com­pet­ing in a big­ger way with the un­or­ga­nized sec­tor for mar­ket dom­i­nance, Higher pro­fes­sion­al­iza­tion, Greater ac­cept­abil­ity for real es­tate as an in­vest­ment as­set class, Op­por­tu­ni­ties to re­tail in­vestors to par­tic­i­pate in the real es­tate sec­tor, As­set di­ver­si­fi­ca­tion to cor­po­rate in­vestors, Help build a vi­brant, sec­ondary real es­tate mar­ket, Im­prove sec­tor trans­parency.

Bhairav Dalal, As­so­ciate Direc­tor, PwC said, if REITS (Real Es­tate and In­fra­struc­ture In­vest­ment Trusts) are al­lowed to in­vest in LLPs hold­ing real es­tate, spon­sors might con­tem­plate set­ting up LLPs for Reits. This would pro­vide slightly higher re­turns to in­vestors, since div­i­dend dis­tri­bu­tion tax is not ap­pli­ca­ble to profit dis­tri­bu­tions made by LLPs.

Shishir Bai­jal, Chair­man & MD, Knight Frank In­dia said, the move by SEBI to is­sue guide­lines for REITs is laud­able as this would bring in pos­i­tive sen­ti­ments and clear con­fu­sion in cash strapped Real Es­tate. REITs specif­i­cally will prove to be effective tool for en­hanc­ing in­vest­ments into the com­mer­cial real es­tate. REITs only look at com­pleted in­come gen­er­at­ing pro­jects so a risk is min­i­mum for in­vestors.

An­other Real Es­tate ex­pert Anshuman Mag­a­zine, Chair­man & MD, CBRE South Asia Pvt. Ltd in wel­com­ing pos­i­tive the SEBI de­ci­sion said this move is a pos­i­tive sig­nal for In­dia’s cap­i­tal mar­kets as a whole, and the re­alty sec­tor in par­tic­u­lar. Re­duc­ing the min­i­mum re­quire­ment for com­mer­cial real es­tate as­set sizes per­mit­ted to be listed in In­dia REITs from Rs.1,000 crore to Rs.500 crore is likely to gen­er­ate more in­come through this new fund­ing chan­nel and en­cour­age many mid-sized devel­op­ment firms to con­sider this av­enue. Having said that, al­though the gov­ern­ment has al­ready clar­i­fied that In­dia REITs will be given ‘pass through tax­a­tion sta­tus’, clar­i­fy­ing the tax struc­ture is of high im­por­tance at the mo­ment. A suc­cess­ful In­dia REIT mar­ket will re­quire strong sup­port from ex­ist­ing land­lords and in­vestors, as well as fa­vor­able mar­ket con­di­tions. All in all, the es­tab­lish­ment of the REIT mar­ket in In­dia is still at a very nascent stage; and suc­cess­ful im­ple­men­ta­tion and devel­op­ment will rest on a num­ber of fac­tors re­lated to the reg­u­la­tory en­vi­ron­ment, mar­ket con­di­tions and is­suers/in­vestors.

SEBI has an­nounced REITs and REMF a po­ten­tial step in Real Es­tate sec­tor which was the need of the hour for strict dis­clo­sures and other reg­u­la­tory norm. De­spite sig­nif­i­cant tax ben­e­fits for the spon­sors of th­ese busi­ness trusts, th­ese new reg­u­la­tions would also be “rev­enue ac­cre­tive” for the gov­ern­ment in form of taxes. As per the pro­posed reg­u­la­tions, they would help in chan­nel­iz­ing do­mes­tic in­vest­ments into real es­tate and in­fra­struc­ture sec­tors, and also help at­tract for­eign cap­i­tal for th­ese fund-starved seg­ments of the econ­omy.

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