Realty & infrastructure trusts clear last hurdle

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Minimum investment `2 lakh for Reits, `10 lakh for InvITs

Realty & infrastructure trusts clear last hurdle
Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) have finally become a reality in India, with market regulator Sebi on Sunday giving its stamp of approval. The new norms are expected to take effect by October 1.

The Sebi board, which met in New Delhi, cleared the new norms for setting up and listing of these trusts, which are estimated to bring in some Rs 1 lakh crore investments from foreign as well as domestic investors into the fund-starved real estate and infrastructure sectors.

These trusts will be listed on the stock exchanges and their units will be traded like shares and mutual fund units.

However, small investors will have to wait for some time before they are allowed to invest in these products, as the minimum investment for REITs has been fixed at Rs 2 lakh and for InvITs at Rs 10 lakh, given the complex nature and potential risks associated with them.

These instruments will provide additional sources for mobilising funds to the realty and infrastructure companies. Finance minister Arun Jaitley had announced incentives for these trusts in the Union budget in July, following which Sebi framed the guidelines.

"REIT is primarily with regard to completed, revenue-generating projects. The idea is, even if somebody can invest Rs 2 lakh, such a person can get the benefit of income from completed realty projects,” Sebi chairman U K Sinha said after the board meet, also addressed by finance minister Arun Jaitley.

REITs are popular globally and they invest primarily in completed revenue-generating real estate assets and distribute the earnings among investors. Typically, these trusts generate incomes from rentals received from such properties. They offer a less risky alternative to investing in under-construction properties and ensure regular income.

InvITs, on the other hand, will raise funds via public issue or private placement for infrastructure investment. They will allow companies to monetise infrastructure projects, either directly or through special purpose vehicle (SPVs). Through InvITs, the government aims to create a new avenue for infrastructure funding to meet an estimated Rs 65 lakh crore investment requirements in this sector during the 12th five-year plan.

Despite Sebi’s efforts, launch of REITs has got delayed because of an unfavourable tax structure. In his July budget, finance minister Arun Jaitley said the government was planning friendlier tax norms for REITs and InvITs. Subsequently, the finance bill passed by Parliament provided for favourable tax treatments of REITs and InvITs.

“With the tax treatments in place and Sebi regulations in place, we can hope that there will be some progress in the real estate market and in the infrastructure market,” Sinha said, adding if “somebody creates an SPV and has made an investment in a real estate project, units of that will be used.”

The Sebi chief said when an SPV is transferred to an REIT, there will be a tax deferral at that stage. Which means no tax will have to be paid at that stage. “When the investor in that original project SPV finally disposes of the property, he will be paying tax at that stage. All that is provided in the finance Act,” he said.

Asked by when the norms will come into effect, Sinha said: “We will take about maybe a month or two. So October 1 is a reasonable time period (for notification).”

To make REITs attractive, Sebi’s final guidelines have lowered the minimum asset size to Rs 500 crore from Rs 1,000 crore proposed earlier. The minimum issue size for an initial offer will be Rs 250 crore with a minimum public float of 25 per cent. Sebi has allowed multiple sponsors for an REIT, but the number of such sponsors should not be more than three, subject to each one holding at least 5 per cent.

“The reduction in asset size to Rs 500 crore will attract more rent-yielding assets under the fold of this vehicle and attract foreign investments, especially from pension funds and insurance companies, which have been catalysts of REIT markets globally. Both these can become drivers of growth for REITs in India,” said Neeraj Bansal, partner and head, real estate and construction, KPMG in India.

The sponsors will need to have a mandatory holding of 25 per cent of REIT units for three years and hold them continuously for 15 per cent thereafter. It will be mandatory for REITs to get their units listed on a stock exchange. Trading lot for such units will be Rs 1 lakh.

The trustees would be required to be independent and not associates of the sponsor or the manager of the trust. The minimum net worth of the manager has been increased to Rs 10 crore from Rs 5 crore proposed in the draft guidelines.

At least 80 per cent of the money mobilised through REITs would be invested in completed and revenue-generating properties, while the remaining 20 per cent can be put in developing properties, mortgage-backed securities, shares of real estate companies and government securities, besides others.

The new norms will ensure that excessive leverage is not undertaken through REITs.

Anuj Puri, chairman and country head of Jones Lang LaSalle India, said up to $10 billion was expected to be raised through REITs in the next five years.

“We will definitely see foreign investors investing in Indian real estate. It will also help developers in raising fresh equity from stock markets, which has been closed for last few years. About $8-10 billion is expected to be raised through REITs over the next five years.”

The country’s largest developer DLF, which has commercial property of around 30 million square feet, said it would take at least a couple of quarters for formation of REITs.

“We are considering REITs, but the procedure could take at least couple of quarters more,” Rajeev Talwar, executive director, DLF told Financial Chronicle.

The InvITs will invest in infrastructure projects, either directly or through SPV. A publicly offered InvIT will need to distribute at least 90 per cent of its net distributable cash flows to investors. Listing will be mandatory for both publicly offered and privately placed InvITs.

The minimum investment size for InvITs would remain at Rs 10 lakh. The minimum networth requirement of an InvIT sponsor would be Rs 100 crore against Rs 10 crore proposed in draft guidelines. The net worth of investment managers has also been raised from Rs 5 crore to Rs 10 crore.

The majority directors of the investment manager will be independent, while it would not be required to have credit rating for non-PPP projects. The associates of trustee would not be allowed to invest in the units of InvITs to avoid conflict of interest.

The norms also allow unit holders to remove a trustee and the manager with the approval of 75 per cent of unit holders, but votes of any related party or associates would not be considered.

The proposed holding of an InvIT in underlying assets cannot be less than Rs 500 crore and the minimum initial offer size would be Rs 250 crore, according to the fresh guidelines. The aggregate consolidated borrowing of the InvITs and the underlying SPVs cannot exceed 49 per cent of the value of the Trust assets, same as the case for REITs.

Industry experts said the norms are positive for the Indian capital market and are expected to free up liquidity for the real estate and infrastructure players. REITs and InvIT norms will facilitate infusion of an estimated $15-20 billion in the sector as an alternative to bank finance.

With amendments, other corresponding regulations, both foreign and domestic institutions and other investors will be eligible to invest in these trusts. They will provide liquidity to investors, as these trusts will be listed and traded on stock exchanges, said

“Reducing the minimum asset value to Rs 500 crore for REIT IPO, introducing the concept of multiple sponsors, withdrawal of single asset REIT concept, allowing additional 1 per cent in other assets and 90 per cent distribution of net distributable cash flows are all very positive and would boost the real estate and infrastructure sectors,” said Pankaj Kapoor, chief executive officer, Liases Foras, a non-brokerage real estate research firm, based out of Mumbai.

jharnamazumdar@mydigitalfc.com

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