Why India Needs Real Estate Investment Trust ?

By Mr. Rajiv Luthra, Ms. Geeta Dhania, Luthra & Luthra Law Offices

Make real estate investment trusts even better mass money magnets by liberalising rules

Novel Investment Method..

A Real Estate Investment Trust (REIT) is a novel investment mechanism being contemplated by the Securities and Exchange Board of India (SEBI).

A REIT owns and manages income-generating developed property and is designed to offer common units to the public as an investment option. Such units represent ownership in the business of managing income-producing properties.

REITs will provide an avenue to real estate developers to commercialise developed property, providing an exit avenue. It will also provide overleveraged companies an opportunity to deleverage. It will increase the depth of the Indian real estate market & provide additional liquidity.

Mr. Rajiv Luthra

REITs would also enable people to channelise their investments into Indias real estate sector through a regulated mechanism. Since the investment in REITs is asset-backed, it is ideal for investors wanting to invest in real estate without the hassle of checks on property titles & the plethora of regulatory approvals.

Considering the current economic slowdown & paucity of funds, REITs are expected to infuse a fresh lease of life into an otherwise choppy market.

Uneven Road to REITs

The draft SEBI (Real Estate Investment Trusts) Regulations, 2013, seem well thought out. However, much is desired to make the REIT structure commercially viable. The obvious & much-discussed road blocks are taxation of REITs, foreign investments in REITs and stamping of agreements relating to transfer of property to the REITs.

In addition to these stumbling blocks,there is a need to fix the following issues to make the REIT regulations workable.

One of the basic premises of the draft REIT regulations is the need to provide an exit avenue & liquidity.However,the definition of real estate seems rather constricted.

The definition of real estate or property should be broadened to include all commercial and residential property and completed infrastructure assets like roads and highways that have a regular income flow.

Policy Marshland..

This will widen the coverage of REIT regulations to cater to the funding requirements of not just real estate but the wider infrastructure sector in India. Further, the sponsor eligibility condition of five (5) years experience in the real estate industry on an individual basis should be widened to enable non-core real estate players such as hotels,hospitals & other corporate houses with real estate to participate in REITs as well.

The draft REIT regulations provide that a REIT can not undertake an initial public offer (IPO) without the prescribed minimum asset value.

However, it may not be commercially viable for a sponsor to first transfer the assets & then approach the market for listing.

Our lawmakers should amend this requirement & may consider a requirement to have the initial portfolio identified and tied in by way of definitive documents prior to the IPO and offering proceeds can be utilised to purchase the assets.

Since the REIT would work akin to a mutual fund model, we can borrow afew concepts from the SEBI (Mutual Fund) Regulations,1996, to make REITs more viable.The mutual fund regulations have a concept of co-sponsors that is conspicuously missing in the draft REIT regulations.

Open Realty to Reality..

Currently, the minimum asset value of a REIT is marked at Rs. 1,000 crore. While there is a need for ensuring financial soundness of the trust, one can not dispute the fact that such a threshold will eliminate many small players.This can be reconciled by providing for the concept of co-sponsors, much such as the mutual fund regulations.

This would enable companies with a smaller portfolio to come together & set up a REIT. Further, clarity should be provided on the pricing & repurchase of unit along the lines of mutual fund regulations.

In recent years, limited liability partnership (LLP) has emerged as a preferred vehicle for real estate developments owing to the various benefits due to it. The investment conditions with respect to REITs should be relaxed to permit investment in LLPs that house real estate assets, and the definition of special purpose vehicle & body corporate can be modified to include LLPs, thereby enabling real estate investments in LLPs that own real estate assets.

Since REIT is a new product for the Indian markets,there may be an initial hesitation by the investors to explore REITs.Therefore, participation by anchor investor in REITs may be considered to inspire confidence among other investors to participate in the REIT.

Additionally, discounts on the price of units to different investor categories may be considered to make investment more attractive.

Conclusion..

In conclusion, while the draft REIT regulations is definitely a step in the right direction for the Indian real estate industry, it will not be a successful effort in mobilising real estate in India unless some of these key concerns are addressed.

About the author..

The writer Mr. Rajiv Luthra is Founder and Managing Partner, Luthra & Luthra Law Offices.

Co-authored with managing associate Ms. Geeta Dhania

Luthra & Luthra Law Offices - New Delhi