Real Estate Investment
Trust (REIT) regime in
India
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REIT regime in India
January 2015 The India REIT regime is aimed at
providing:
The REIT regime • an organised market for retail investors
to invest and be part of the Indian real
On 26 September 2014, the Securities and estate growth story
Exchange Board of India (SEBI) notified • a professionally managed ecosystem that
the Real Estate Investment Trusts (REITs) is risk averse and is aimed at protecting
regulations, thereby paving the way for the interest of public
introduction of an internationally acclaimed • an exit platform for the real estate sector
investment structure in India. The Finance to ease out liquidity burden
Minister has also made necessary
amendments to the Indian taxation regime This document highlights some of the
to provide the tax pass through status, key aspects of the Indian REIT regime.
which is one of the key requirements for
feasibility of REITs.
REITs have been in existence in developed
economies since several years and provide a
stable investment alternative for retail
investors, as well as the real estate
sector. Taking cue from developed
economies, the Indian REIT regime echoes
the internationally followed concepts,
methods and principles.
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REIT regime in India
Typical structure of a REIT Commercial aspects (continued)
• transparency is an important element in
Unit holders (investors
the REIT story, which can be analysed
and sponsor)
in two different ways:
- REITs provide tax transparency.
Trustee Manager
This means that the REIT does not
REIT pay any corporate tax in exchange
for paying out strong, consistent
dividends. Rather, taxes are paid by
the individual shareholder only
- Further, considering that the listed
SPV
REITs will be registered and
regulated by the SEBI and adhere to
highest standards of corporate
REIT assets REIT assets governance, financial reporting and
information disclosure, the REITs
In India will provide operational
transparency
Commercials aspects
• increasingly, shareholders are
scrutinising the corporate governance
• REITs offer a natural experiment in
practices of publicly traded companies.
corporate governance due to the fact
Good corporate governance is reflected
that they leave little free cash flow for
in higher valuations; companies that
management, which reduces the level of
have high governance ratings are also
supervision required from the market
those that tend to have higher
watchdogs
valuations in the marketplace as well as
stronger total returns
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REIT regime in India
Commercial aspects (continued) Commercial aspects (continued)
Listed REITs are regularly lauded by • listed Equity REITs in the U.S. are also
independent agencies and investment registered and regulated by the SEC,
analysts for their strong corporate ensuring adherence to SEC standards of
governance practices. REITs typically corporate governance, financial
receive high marks in important areas reporting and information disclosure.
such as executive compensation The resilience of listed Equity REITs in
structures, the composition of board of recovering from sharp declines in values
directors and shareholders’ voting rights during the 2008–2009 global financial
• while REITs has been recently market crisis also is noteworthy
introduced in India, there are other • from the beginning of the equity market
economies which have successfully recovery in March 2009 through 2013,
implemented REITs. For many years, listed U.S. Equity REITs delivered an
investors considered real estate the average annual total return of 28.3%,
ultimate immovable, illiquid asset. compared to 23.6% for the S&P 500
However, the liquidity of Equity REITs Index. However, in a recent study of the
listed on major stock exchanges makes Singapore REITs (S-REITs), it is
real estate investing fast, easy and observed that there is no positive
efficient. Listed Equity REITs also correlation with operating performance
provide market transparency for proxied by accounting measures. S-
investors, with real-time pricing and REITs, with higher corporate
valuations. As with other stocks, governance, tend to register better risk-
investors can get in and out of their adjusted returns but do not outperform
investments to optimise their exposure operationally. To test for market
to real estate efficiency, the study also observed that
the S-REITs with the best corporate
governance practices also have less
information asymmetry
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REIT regime in India
Indian framework Indian framework (continued)
Legal form • mandatory distribution of at least 90%
of the net distributable cash flows to be
• REIT shall be a Trust set up under the to investors on a half-yearly basis
Indian Trust Act, 1882 and it must be • mandatory distribution of at least 90%
registered under the SEBI (Real Estate of the sale proceeds from sale of assets
Investment Trusts), Regulations 2014 to unit holders, unless reinvested in
• REITs to raise funds through an initial another property
offer and subsequently through follow- • onerous duties and responsibilities
on offer, rights issue, qualified casted on Trustee and Manager to
institutional placement, etc ensure strict adherence to the REIT
• minimum asset size, to be proposed by regulations
REITs, is prescribed as Rs 500 crore • mandatory requirement for a full-
and the minimum offer size for initial fledged valuation of all REIT assets on a
offer is prescribed as Rs 250 crore yearly basis through a registered valuer.
• minimum 200 subscribers required to Semi-annual updation made mandatory
form a REIT (excluding related parties) • declaration of Net Asset Value (“NAV”)
• REIT units are mandatorily required to within 15 days from the date of
be listed on recognised stock exchanges valuation/ updation of valuation of
in India. Besides, they need to be in assets
demateralised form • any acquisition/ transfer of REIT Assets
• minimum public share in initial offer to meet prescribed valuation guidelines
should not be less than 25% of the
number of units of the REIT on post-
issue basis
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REIT regime in India
Indian framework (continued) Indian framework (continued)
REIT Assets / Investments - convention centres, with project cost
of more than Rs 300 crore each
• all assets to be situated in India - agricultural land or vacant land
• REIT Assets to include: - units of another REIT
- land and any permanently attached • mortgages not eligible to be REIT
improvements to it (whether Assets
leasehold or freehold) including • at least 80% of value of the REIT
buildings, sheds, garages, fences, Assets to be invested in completed and
fittings, fixtures, warehouses, car rent generating properties. Specific
parks, etc conditions prescribed for investing the
- Transferable Development Rights balance funds in other assets
(TDRs) • REIT shall invest in at least two projects
- any other assets incidental to the and investment in one project should
ownership of real estate not exceed 60% of the value of assets
• assets Not forming a part of REITs owned by REIT
- hospitals • REIT Assets could be held directly by
- hotels, with project cost of more the REIT or via Special Purpose
than Rs 200 crore each in any place Vehicles (SPVs)
in India and of any star rating. 3-star • REIT to hold not less than 50% equity
or higher category classified hotels and controlling interest in SPVs
located outside cities with population • SPV to hold 80% equity in REIT Assets
of more than 1 million • multi-layer SPV structure may not be
- common infrastructure for industrial permitted and multiple scheme under
parks, Special Economic Zones REIT is not permitted
(SEZs), tourism facilities and
agriculture markets
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REIT regime in India
Key takeaways - Unit holder • experience requirement - at least 5 years
of experience in real estate industry (per
• can be any person excluding the sponsor)
Trustee, Principle Valuer or another • where sponsor is a developer, he must
REIT have at least two completed projects
• foreign investors are also permitted to • lock-in period
invest in a REIT, subject to permissions - three years from the date of listing
from the Reserve Bank of India (RBI) for 25% of the total units of the
and Government of India REIT
• minimum unit size and trading lot size - one year in the case of units
of REIT is Rs 1 lakh. However, the exceeding 25%
minimum subscription amount per - collectively hold minimum 15% of
investor (upon public offer) is Rs 2 lakh the outstanding units of REIT,
• all unit holders to have equal voting throughout the life of the REIT
rights
Key takeaways - Trustee
Key takeaways - Sponsor
• must be registered with SEBI
• responsible for setting up the REIT. • should not be an associate of Sponsor/
Person swapping their shares of SPV for Manager/ Principal Valuer. If the
units of REIT are also regarded as Trustee is an associate of REIT, at least
Sponsors 50% of the directors of the trustee
• REIT can have maximum three should be independent
sponsors, each holding at least 5% of • responsible for holding REIT assets in
the units of the REIT, post-listing the name of REIT and ensuring that the
• Net worth requirement - at least Rs 100 assets have proper legal and marketable
crore collectively for all sponsors, and titles
individually each sponsor to have net
worth of at least Rs 20 crore
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REIT regime in India
• appointing Manager of the REIT • responsible for the entire management
• given a fiduciary responsibility of of REIT assets, appointment of
ensuring proper utlisation of auditors, principal valuer, constitution of
subscription amount, ensuring that all investment committee, declaration of
material contracts entered into on behalf dividends, etc
of REIT are legal, valid, binding and • change in Manager requires prior
enforceable and overseeing activities of approval of a majority of contributors
Manager and obtaining quarterly
compliance certificates Key takeaways - Principal valuer
• need to be a registered valuer as per
Key takeaways - Manager Section 247 of the Companies Act, 2013
• should have experience of at least five
• responsible for day-to-day operations years in valuation of real estate
and management of the REIT • must be engaged to provide a valuation
• net worth requirement – at least Rs 10 of assets for every purchase or sale of
crore asset by REIT
• experience requirement – at least 5 years • responsible for ensuring impartial, true
of fund management/ advisory and fair valuation of assets of REIT
services/ property management in the • cannot accept valuation linked
real estate industry or in development of remuneration
real estate. Manager’s team to consist of
at least two employees, each having at
least five years of experience
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REIT regime in India
Taxation regime
• specific taxation regime has been introduced to deal with income earned via REITs. This is
summarised as follows:
Nature of income Taxation for REIT Taxation for unit holders/ sponsor
Taxable as interest income
Interest from SPV Exempt
Withholding tax to be deducted by REIT on distribution
(Non-resident – 5%, Others – 10%)
Dividend Exempt Exempt
Capital gains earned At the rates
by REITs on sale of applicable to Exempt
share of SPV capital gains
Capital gains earned For unit holders (other than Sponsor)
Not applicable
by unit holders on - long-term – exempt
sale of REIT units - short-term – 15%
For sponsors (for units acquired on account of swap of
shares of SPV for REIT units)
Capital gains earned - long-term – 20% (if units are held for more than 36
by Sponsor on sale of Not applicable months)
REIT units - Short-term – 30%;
(cost of SPV shares and period of holding of SPV
shares to be considered)
Maximum
Other income Exempt
marginal rate
• for Sponsors, transfer of shares of SPV to a REIT in exchange of units is not considered a
transfer. The tax payable is deferred to the date when the Sponsor sells the units of REIT
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REIT regime in India
Singapore REITS (S-REIT) – a S-REITs – Taxation
comparison
• any distributions made by S-REITs to
Singapore, as a jurisdiction has gained foreign or local investors shall be exempt
tremendous importance and significance in the from tax, provided at least 90% of the
REIT space, especially because of the following: taxable income is distributed
• S-REITs currently enjoy tax exemption on
• provides a wider scope of investable assets foreign income on fulfilling certain
• has clear restriction on investing in conditions till 31 March 2015
underdevelopment properties • individual investors are generally exempt
• allows investment in real estate assets from tax
situated outside Singapore as well • qualifying foreign corporate investors are
• allows investment by foreign players taxed at 10%
(without specific approval) • Singapore corporate investors are taxed at
• stamp duty exemption provided for the prevailing corporate tax rate
acquiring assets
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REIT regime in India
In conclusion
In India, in the absence of a regulator for the
real estate sector, introduction of REITs is a
welcome move that will help bring in: Largely, the Indian REIT regime
1. liquidity is at par with the international
2. transparency REIT format and seems to have
3. better governance what is needed to provide the
4. organised platform for retail investment right impetus to the Indian real
5. an ecosystem, which is professionally estate sector.
managed and protects investors
Attest
services
and
Financial Making
Reporting you REIT
Advisory ready
Services Formation
On-going of REIT Valuation
compliances
Where can
we help
you ?
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REIT regime in India
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