Market regulator Securities & Exchange Board of India (SEBI) is looking to allow real estate investment trusts (REIT) in India which could open up new funding channels for real estate assets in the country. The regulator has, however, said REITs would be allowed only for large assets in its draft note for a separate regulatory framework under SEBI (Real Estate Investment Trusts) Regulations, 2013.
It has said that for coming out with an initial offer, it has been specified that the size of the assets under the REIT shall not be less than Rs 1,000 crore ($160 million) which is expected to ensure that initially only large assets and established players enter the market.
Further, it has called for a minimum initial offer size of Rs 250 crore and minimum public float of 25 per cent to ensure adequate public participation and float in the units. The minimum public holding norms are in line with listing conditions for firms on the stock exchange.
The REIT shall be set up as a trust under the provisions of the Indian Trusts Act, 1882 and it shall not launch any schemes. The REIT shall have parties such as trustee (registered with SEBI), sponsor, manager and principal valuer. The trust will need to get registered with SEBI post which it can raise funds through an initial offer and once listed, may subsequently raise funds through follow-on offers. Listing of units shall be mandatory for all REITs.
The REIT may raise funds from any investors, resident or foreign. However, initially, till the market develops, it is proposed that the units of the REITs may be offered only to HNIs/institutions and therefore, it is proposed that the minimum subscription size shall be Rs 2 lakh and the unit size shall be Rs 1 lakh.
The market regulator had previously released a first draft of guidelines for REITs in 2008 after which the entire REIT framework was withdrawn to make way for real estate mutual fund (REMF), which eventually did not see the light of the day.
“The positive thing is that the statement clearly spells the need for REITs in India at the earliest considering its huge popularity across the world,” according to Anuj Puri, chairman & country head of consultancy firm Jones Lang LaSalle India.
The current draft is open for public comments until October 31, 2013.
Trustee, manager and sponsor
The trustee shall be independent of sponsor and manager and hold the REIT assets in the name of the REIT for the benefit of the investors with a primarily supervisory role.
To ensure that the activities of the REIT are managed professionally, it has been specified that the manager needs to have at least five years of related experience coupled with other requirements such as minimum net worth of Rs 5 crore.
The sponsor shall be obligated to maintain at least 25 per cent holding (pre initial offer) in the REIT to ensure a ‘skin-in-the-game’ at all times. This stake shall be held for at least three years from the date of the listing of such units and units exceeding 25 per cent mark shall be held for at least one year from the date of listing. The sponsor shall also ensure at least 15 per cent of the outstanding units of the REIT at all times.
Even in those cases where the sponsor sells its units it shall arrange for another person/entity to act as the re-designated sponsor.
The sponsor(s) also need to have at least Rs 20 crore net worth and experience of at least five years in the field.
Refund and delisting
The REIT shall have to return the money if the initial offer fails to garner at least 75 per cent of the target corpus or less than 20 investors participate in the offer. The units of the REIT would need to be listed within 15 days of the closure of the offer.
The trustee shall apply for delisting if the public float falls below the prescribed limit, the number of unit holders other than related parties to the REIT falls below 20, SEBI or the stock exchange requires such delisting for violation of the listing agreement, sponsor/manager requests such delisting which is also approved by unit holders or unit holders themselves apply for such delisting.
Investment conditions and dividend policy
In line with the nature of the REIT to invest primarily in completed revenue generating properties, it has been mandated that at least 90 per cent of the value of the REIT assets shall be in completed revenue generating properties. Revenue or rent generating property shall mean property of which not less than 75 per cent of the area has been rented/leased out.
The remaining 10 per cent of REIT assets can be invested in developmental properties, provided that such investment shall only be in properties which shall be held by the REIT for not less than three years after completion and shall be leased out; listed or unlisted debt of companies; mortgage backed securities; shares of public listed companies which derive at least 75 per cent of their revenues from real estate activity; government securities or money market instruments or cash equivalents.
To ensure regular income to the investors, it has been mandated to distribute at least 90 per cent of the net distributable income after tax of the REIT to the investors.
REITs have been allowed to invest in the properties directly or through special purpose vehicles (SPV), wherein such SPV holds not less than 90 per cent of their assets directly in such properties. However, in such cases, it has been mandated that REIT shall have control over the SPV so that the interest of the investors of the REIT are not jeopardised.
The REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage backed securities. Further, the REIT shall only invest in assets based in India. It shall not invest in units of other REITs.
Investment upto100 per cent of the corpus of the REIT has been permitted in one project subject to the condition that the minimum size of such asset is not less than Rs 1,000 crore.
All related party transactions shall be on an arms-length basis and shall be disclosed to the exchanges and investors periodically. For any related party transactions for acquisitions/sale of properties, valuation reports from two independent valuers shall be obtained and the transaction for purchase/sale of such properties shall be at a price not greater/less than average of the two independent valuations.
Investors' approval is required for all the related party transactions wherein the value is above a threshold as provided in the proposed regulations.
Borrowings, valuation, disclosure norms and investor rights
To avoid excessive leverage, the aggregate consolidated borrowings and deferred payments of the REIT have been capped at 50 per cent of the value of the REIT assets. If the same exceeds 25 per cent, requirement of credit rating from a credit rating agency and approval of majority of investors has been specified.
To ensure that the underlying assets of REIT are valued accurately, requirement of a full valuation, including a physical inspection of the properties, has been specified at least once a year. Further, a six monthly update in the valuation capturing key changes in the last six months has also been specified. Consequently, NAV shall be declared at least twice a year. Provisions have also been specified for valuation in case of any material development.
Detailed disclosures have been specified for the annual and half-yearly valuation reports.
Further, for any purchase of a new property or sale of an existing property, it has been required that a full valuation be undertaken and the value of the transaction shall be not less than 90 per cent or more than 110 per cent of the assessed value of the property for sale/purchase of assets, respectively.
The investors shall have the right to remove the manager, auditor, principal valuer, seek delisting of units, apply to SEBI for change in trustee, etc. An annual meeting of all investors is mandatory to be convened by the trustee wherein matters such as latest annual accounts, valuation reports, performance of the REIT, approval of auditors and their fees, appointment of principal valuer, etc. shall be discussed.
Further, approval of investors has been made mandatory in special cases such as certain related party transactions, any transaction with value exceeding 15 per cent of the REIT assets, borrowing exceeding 25 per cent, change in manager/ sponsor, change in investment strategy, delisting of units, etc.
In order to ensure that a related party does not influence the decision, it has been specified that any person who is a party to any transaction as well as associates of such person(s) shall not participate in voting on the specific issue.
(Edited by Joby Puthuparampil Johnson)