REITS: In funds-starved times, a ray of hope
Authored by Divya Malcolm. She is a Partner at Kochhar & Co., Advocates and Legal Consultants. The views expressed in this article are her own and not that of the firm. Developers, with high inventory of completed commercial property, can shore up capital through Reits The Securities Exchange Board of India (SEBI) notified Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations (“Reit Regulations”) in 2014. However, until the last quarter of 2019, there were no takers for Reits. In no small measure, SEBI’s sweeping changes may have contributed to the current uptake. What is a Reit and what were these changes are briefly discussed below: Basics of Reits Very much on the lines of a Mutual Fund, a Reit is a private trust formed under the Indian Trusts Act, 1882, and registered with SEBI. Upon registration, a Reit can issue units to various investors. Its assets and investment decisions are taken by an expert manager under the watch of a trustee. It is the brief of a trustee to look after the interest of the unit holders. Typically, the sponsors responsible for setting up a Reit are entities desirous of monetizing immovable property owned by them. The most fundamental features of a Reit are: (a) 80% of the asset value of a Reit is required to be invested in rent or income generating properties (remaining 20% is discussed later), and (b) at least 90% of net distributable cash flows of a Reit are required to be distributed to the unit holders twice a year. A retail investor is thus assured of a periodical returns, backed by high quality real estate assets. International Overview Since India has no history of Reits, it’s but natural to look to other jurisdictions for their performance. The United States is perhaps the largest Reits jurisdiction, and where they were introduced first, way back in1960. Today, REITs of all types collectively own more than $3 trillion in gross assets across the U.S. Even in developed economies, Reits were introduced much later: 2003 in France, 2006 in the United Kingdom, and 2007 in Germany. Interestingly, in Japan and South Korea, banks used Reits in an attempt to recapitalize their balance sheets on the back of an increasing percentage of non -performing assets. 2017 Amendments: Originally, a Reit could invest in the assets either directly or through a Special Purpose Vehicle (SPV). Hence, only a one-level investment structure was allowed. This proved to be a sticky wicket as assets are usually held through multiple layers of investment. In 2017, SEBI made suitable amendments to the Reits Regulations. Thus, presently (a) a Reit can have a controlling stake of 51% in the Holding Company (HoldCo.), provided that (b) the HoldCo., in turn, owns a controlling stake of 51% in the SPV which holds all the assets in its own name. Further, the ultimate holding interest of a Reit in the underlying SPV should be at least 26%. A Reit can, today, invest the remaining 20% of the assets in unlisted equity shares or debt of real estate companies, mortgage backed securities, Transferable Development Rights (TDRs) etc. A Reit can also issue listed debt securities. In an environment where the banks have curtailed their finance to real estate, our Non-Banking Finance Companies are on the brink. For those with large completed stock of commercial property, Reits may be the answer for their additional capital requirements.
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