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Here comes the first applicant for real estate investment trust

24 October, 2016

Embassy Office Parks, a joint venture between Bangalore-based real estate developer Embassy Group and private equity giant Blackstone Group, has filed for real estate investment trust (REIT) with market regulator Securities and Exchange Board of India (SEBI), marking the first application by a developer for such listing.

According to a statement by the regulator, the application was filed on 6th of this month and is currently being processed. SEBI is likely to process the application and come out with an approval in 30 days. 

The Blackstone-Embassy joint venture (JV) was formed in 2012 with an aim to create office spaces and business communities. This portfolio includes Embassy Golf Links, Embassy Manyata Business Park, Embassy TechVillage and Embassy TechZone.

The realtor has so far developed 37 million sq ft of commercial, residential, retail, hospitality and industrial spaces and holds an extensive land bank of 1,700 acres across the country. Its operation spans across Indian and international markets such as Bangalore, Chennai, Pune, Coimbatore, Malaysia and Serbia in Eastern Europe.

On the commercial front, the group claims to have delivered 28 million sq ft of income generating properties. 

First REITs in India

Even though REITs have been at the centre of real estate-related debate for a long time, this is the first application for a listing by a developer, paving the way for such trust to take shape in India.

In media interactions, Jitu Virwani, chairman, Embassy Group, has said the company is looking to raise roughly Rs 4,000 crore through the listing.

Several developers, which are heavy on office and retail assets, have been nourishing plans to go the REITs-way. However, the delay due to tax complexities and structure-related norms has derailed their plans a bit. Some of them are now exploring private REITs structure to monetise their assets. 

Another strong contender in the fray is realty major DLF that has been planning to float two separate REITs – one each for commercial and residential segments. It is currently in the midst of selling 40% stake held by promoter group in the rental arm of the company.

Bangalore-based RMZ, which has a joint investment platform with Qatar Investment Authority (QIA), is another strong applicant in the fray for REITs. The company is in the process of filing its prospectus for the trust and is likely to look at listing by the first quarter of 2017. 

According to a note by real estate consultancy firm JLL India, India’s Grade-A office space universe is in excess of 464 million sq ft of which about 25% – valuing approximately $18 billion – is expected to get listed by 2019. “While industry expects anywhere between 25% and 100% of the Grade-A office space in India to get listed under REITs, we believe expecting anything above 25% is more optimistic than realistic,” it said.

Even 25% of the office space listing under REITs is higher than what is seen across APAC, it added. 

The research firm had said that big funds and developers such as Blackstone, Phoenix, Brookfield, DLF and Raheja, which have a sizeable portfolio of quality leased/leasable assets, were expected to launch REITs this year but the first REIT listing is now expected only in the first half of 2017.

REITs so far

REITs have had to wait for a long time to reach this stage, going back and forth on norms, amendments and tweaks. Considered a new wave of financing for asset owners, it finally shaped up with the latest amendments that were carried out last month.

In September, SEBI allowed REITs and InvITs to invest in two-level (special purpose vehicle) structures through a holding company. This is subject to sufficient shareholding in the holding company and the underlying SPV.

It removed the limit on the number of sponsors. Currently, three sponsors are required. Besides, such trusts are allowed to have the right to appoint majority directors in the SPV.

Further, the holding company would be allowed to distribute 100% cash flow realised from underlying SPVs and at least 90% of the remaining cash flow.

Regarding REITs, SEBI proposed to allow such trusts up to 20% investment by such trusts in under-construction projects, up from 10% currently.

SEBI also proposed to rationalise the requirements under related-party transactions, under which approval of 60% unit holders apart from related parties, is required for passing a related-party transaction.

SEBI had notified the REIT and InvIT regulations in 2014, allowing setting up and listing of such trusts, which are popular in some advanced markets. However, no trust has been set up so far as investors wanted more measures, including tax breaks, to make these instruments more attractive.

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Here comes the first applicant for real estate investment trust

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