Real Estate Investment Trusts in India (REITs)

Real Estate Investment Trusts in India (REITs)

Structure:-

REIT’s shall have a three (3) tier structure comprising of Sponsor(s), Trust and Fund Manager.

Features of REIT’s:-

1. REIT shall be mandatorily registered with SEBI.
2. REIT assets or units can be fully held by its sponsors without the need for any public issue for a maximum period of 3 years only. Within the end of 3 years if the REIT has failed to make an initial offer then the REIT shall surrender its certificate of registration to SEBI and cease to be an REIT.
3. If the sponsors of the REIT decide to increase the corpus by way of issuing additional units then the first initial offer of its units should be by way of public issue only. This means that the REIT cannot use the mechanism of private placement or preferential allotment for its first issue of units.
4. The initial offer of units by the REIT can be made only if:-
   1. The value of the assets owned by the REIT is Rs. 500 Crores or more.
   2. The units proposed to be offered to the public is not less than 25% of the total outstanding units post issue.
   3. The offer size is Rs. 250 Crores or more
   4. The minimum expected number of unit holders of the REIT (forming part of the PUBLIC) shall be 200 at all times.
5. Follow-on or subsequent issue of units may be by way of follow-on public offers, preferential allotment, qualified institutional placement, rights issue, bonus issue, offer for sale or any other mechanism as may be specified from time to time by SEBI.
6. REIT units may be issued to any persons, whether resident or foreign. The foreign investors shall be subjected to the provisions or guidelines of RBI.
7. The minimum amount of subscription or application money that a REIT can receive from a unit holder should not be less than Rs. 2 Lakhs.
8. The IPO or FPO should not be for more than 30 days.
9. The allotment of the units post issue shall be done within 12 working days from the date of closing of the issue.
10. REIT units shall be issued only in dematerialized format only.
11. The issue price of the REIT units shall be determined through book building process.
12. Green-Shoe option is available upto 25% of the issue size.
13. After the issue to the public, it is mandatory for the REIT to list the units on a recognized stock exchange within 12 working days from the date of closure of the offer.
14. Trading lot of the REIT units shall be Rs. 1 Lakhs.
15. REIT can redeem units only by way of buy-back or at the time of de-listing of units.

 

Eligibility Criteria:-

Eligibility of the Sponsor:-

1. REIT can have a maximum of 3 sponsors.
2. Each such sponsor shall hold more than 5% of the REIT units on post-initial offer basis.
3. The sponsors on a collective basis shall have a net worth of Rs. 100 Crores or more.
4. Each sponsor shall have an individual net worth of Rs. 25 Crores or more.
5. The sponsor or its associate(s) shall have a minimum experience of 5 years in developing real estate or fund management in the real estate industry.
6. If the sponsor is a developer then at least 2 projects of the sponsor should have been completed.

Eligibility of the Trust:-

1. The Trust should be a registered trust under the Indian Trust Act, 1908.
2. The Trust Deed should have its main objectives as undertaking of REIT in accordance with the regulations of SEBI and should include the responsibilities of the Trustees in accordance with the Regulations 9 of SEBI’s REIT regulations.
3. The sponsor, trustees and manager should be separate entities.

Eligibility of the Manager:-

1. If the manager is a body corporate or a company then the manager should have a net worth of Rs. 10 Crores or more.
2. If the manager is an LLP then the net tangible assets should be Rs. 10 Crores or more.
3. The manager should have 5 years or more of experience in fund management or advisory services or property management in the real estate industry or in development of real estate.
4. The manager should have 2 key persons who each have not less than 5 years of experience in fund management or advisory services or property management in the real estate industry or in development of real estate.
5. If the manager is a body corporate or a company then a minimum 50% of its directors should be independent directors. Those directors should also not be members of another REIT(s).

Eligibility of the Trustees:-

1. The trustee is registered with SEBI under SEBI (Debenture Trustees) Regulations, 1993 and is not an associate of the sponsor(s) or manager.

 

Investment Restrictions:-

1. REIT may invest in under-construction properties either directly or through SPV.
2. REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage backed securities.
3. At least 80% of the value of the REIT assets shall be invested in completed and rent generating properties. The remaining 20% may be invested in the following assets:-
   1. Under-construction properties
   2. Non-rent generating properties
   3. Listed or unlisted debt of companies or body corporates in real estate sector.
   4. Mortgage backed securities.
   5. Equity shares of companies listed on a recognised stock exchange in India which derive not less than 75% of their operating income from real estate activity as per the audited accounts of the previous financial year.
   6. Government securities.
   7. Un-utilized FSI of a project.
   8. TDR rights.
   9. Money market instruments or cash equivalents.
4. The REIT shall arrange adequate insurance coverage for the real estate assets of the REIT.
5. At least 75% of the revenues of the REIT and the SPV should be rent generating.
6. REIT should hold at least 2 projects directly or through SPV, which should comprise not more than 60% of REIT assets.
7. The minimum duration of holding a rent generating property shall be 3 years from the purchase of that property.
8. REIT cannot invest in units of other REITs
9. REIT cannot lend to any person or body corporate. Investment in debt securities is not considered as lending.
10. REITs cannot launch any schemes.
11. While purchasing or selling a property, two valuation reports from two different valuers, independent of each other, shall be obtained. The transaction price of purchase of such asset(s) shall be at a price not greater than the average of the two independent valuations. Similarly, the transaction price of sale of such asset(s) shall be at a price not lesser than the average of the two independent valuations.
12. REITs can borrow money but the total borrowing cannot exceed 49% of the value of the REIT assets.
13. No valuer shall undertake valuation of the same property for more than 4 years consecutively. There may be a gap of at least 2 years before re-appointment of the same valuer.

 

Other General Restrictions:-

1. No unit holders of the REIT can enjoy preferential voting or any other rights over any unit holder.
2. There cannot be multiple classes of units of REIT.
3. The trustees shall ensure that subscription amount is kept in a separate bank account in the name of the REIT and is only utilized for adjustment against allotment of units or refund of money to the applicants till the time such units are listed.
4. The trustee shall ensure that the remuneration of the valuer is not linked to or based on the value of the asset being valued.
5. The trustees and its associates shall not invest in units of the REIT in which it is designated as the Trustee.
6. The manager shall appoint an auditor for a period of not more than 5 consecutive years. However, if the auditor is not an individual, he/she may be reappointed for another 5 consecutive years, subject to the approval of unit-holders in the annual meeting.
7. Computation of NAV of the REIT shall be based on the valuation done by the valuer and is declared no later than 15 days from the date of such valuation.
8. Valuation shall be done once in six months.
9. Audit of the accounts of the REIT by the auditor shall be done twice in a financial year.
10. The sponsor should hold a minimum of 25% of the total units of REIT after the initial offer on a post-issue basis for a period of at least 3 years from the date of listing of such units. After the 3 years period, the sponsors may reduce their unit holding. However, such reduction of holding should not be less than 15%.
11. If the sponsors have held units exceeding the minimum 25% limit then such excess units shall be continued to be held for at least one year from the date of listing of units.
12. Each sponsor should hold not less than 5% of the outstanding units at all times.
13. If the sponsors wish to sell their units and exit out of the business then they can do so only after 3 years from the date of listing of units. However, such sale and exit can be only possible to another entity or person who would become the “re-designated sponsor”.
14. The sponsor and the proposed re-designated sponsor shall obtain approval from the unit holders or provide option of exit to the unit holders also in accordance with the guidelines.

 

Explanations:-

1. “Completed Property” means property for which occupancy certificate has been received from the relevant authority.
2. “Associate” includes persons or body corporate or promoters of the body corporate(s), including group companies and companies under the same management.
3. “Floor Space Index (FSI)” mean the buildable area on a plot of land as specified by a competent authority.
4. “Investment Management Agreement” means an agreement between the trustee and the manager which lays down the roles and responsibilities of the manager towards the REIT.
5. “Net Asset Value (NAV)” means the value of the REIT divided by the number of outstanding units as on a particular date.
6. “Preferential Issue” means an issue of units by a listed REIT to any select person or group of persons on a private placement basis and does not include an offer of units made through a public issue, rights issue, bonus issue, qualified institutions placement or any other issue.
7. “Real Estate” or “Property” means land and any permanently attached improvements to it, whether leasehold or freehold and includes buildings, sheds, garages, fences, fittings, fixtures, warehouses, car parks, etc. and any other assets incidental to the ownership of real estate but does not include mortgages.
8. “Real Estate Assets” means properties owned by REIT whether directly or through a special purpose vehicle.
9. “Right-of-first-refusal” or “ROFR” of a REIT means the right given to the REIT by a person to enter into a transaction with it before the person is entitled to enter that transaction with any other party.
10. “Special Purpose Vehicle (SPV)” means any company or LLP in which (a) the REIT holds controlling interest of more than 50%, AND (b) which holds not less than 80% of its assets directly in properties and does not invest in other SPV’s, AND (c) which is not engaged in any other activity other than holding and developing property and any other activity incidental to such holding and developing.
11. “Transferable Development Rights (TDR)” means development rights issued by the competent authority in lieu of the area relinquished or surrendered by the owner or developer or by way of declared incentives by the government or authority.
12. “Under-Construction Property” shall mean a property of which construction is not complete and occupancy certificate has not been issued or received.
13. “Unit” means a beneficial interest in the REIT.
14. “Valuer” means any person who is a registered value under Section 247 of the Companies Act 2013 and who has been appointed by the manager to undertake valuation of the REIT assets.