12.10.13

SEBI outlines REIT norms

Aiming to channelize individual investors’ money into the real estate sector in a transparent manner, market regulator Sebi came out with a set of proposals for public discussion which may become rules for launching Real Estate Investment Trusts (REITs) in India.
REITs, which are equivalent to mutual funds that invest in real estate assets, are tax-efficient investment products and are listed on the bourses for ease of liquidity.
Earlier in 2008, Sebi had proposed launching REITs in India but the sub-prime crisis in the US and the subsequent global financial crisis had put the initiative in the backburner.

Capital market regulator Sebi has revived a proposal to allow real estate investment trusts, or REITs, in India in an attempt to provide developers and private equity funds access to liquidity and attract money to the country’s sluggish real estate sector.
After putting its original plan on the back burner in 2008, the regulator had proposed real estate mutual funds, which also didn’t materialise. REITs primarily invest in completed, revenue-generating real estate assets that are comparatively less risky than investing in under construction properties and provide regular income to investors from the rentals received.
Globally, the US, Australia and Singapore have established a framework for REITs.
Sebi feels that the growing scale of the corporate sector operations has increased the demand for commercial buildings and space. “For such a rapidly growing industry, it is crucial that investment vehicles such as REITs evolve in the country,” the regulator said in a consultative paper on Thursday. The new proposal is open for public comments until the end of the month.
A REIT would have to be set up as a trust and wouldn’t be allowed to launch any schemes. Such an entity would have to apply for registration with the regulator and would have a trustee, sponsor, manager and principal valuer. Once registered, it would be able to raise funds through an initial offer and its units need to be mandatorily listed on an exchange with the net asset value declared at least twice in a year.
For launching an initial offer, the size of the assets under the REIT would have to be at least Rs.1,000 crore. The regulator said this will ensure that only established companies with large assets enter the market. Besides this, the minimum initial offer size would have to be Rs.250 crore, with a minimum public float of 25%. The regulator has also proposed that at least 90% of the value of the REIT assets would have to be in completed revenue-generating properties and the balance 10% in others. REITs will be able to invest in properties directly or through special purpose vehicles. Sebi said REITs may raise funds from any investor, resident or foreign, but initially only high net worth individuals and institutions should be offered the units and so has proposed to keep the minimum ticket size for investment at Rs.2 lakh and the unit size at Rs.1 lakh.
The regulator has proposed that sponsors should also compulsorily maintain a certain percentage of holding in the REIT “to ensure a ‘skin-in-the-game’ at all times. Even in those cases where the sponsor sells its units, it shall arrange for another person or entity to act as the re-designated sponsor,” Sebi said. Sanjay Dutt, executive managing Director, South Asia, Cushman & Wakefield, said, “Sebi’s move to issue this consultation paper will revive substantial investor interest from domestic and global investors in India’s currently subdued real estate markets as it moves towards more organised and globally well accepted practises for funding real estate developments. Allowing REITs to operate in India would be a sign of the maturity of the Indian real estate markets as globally REITs are found in mature economies. This is because it reduced individual speculation in realty assets and allows for more professional investment, management in the sector.” 

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