Understanding of REIT Structure and Impact on Real Estate Industry
1. Understanding of REIT Structure and Impact on Real Estate Industry
Manan Choksi
Regional Director
RE/MAX Gujarat
2. Agenda:
• Background
• Structures of REITs
• Salient Features of SEBI Regulations
• Regulatory Framework
• Taxation
• REIT
• Sponsors
• Unit Holders
• Responsibilities of various parties to the REIT
• How this will help real estate industry?
• Benefits for small real estate players
RE/MAX Gujarat
5. Background
Evolution of REITs
Global evolution of REITs
1970s
•Australia (1970)
RE/MAX Gujarat
Source: European Public Real Estate Association (EPRA) - Global REIT Survey 2013
REITs started in the US in 1960. Over the past 50 years, the US REITs has
attracted a market capitalisation of over USD600 billion and has been
adopted in several parts of the world. As of 30 June 2014, there were 456
stock exchange-listed in the FTSE EPRA/NAREIT Global Real Estate Index in
47 countries around the globe. Of the USD1.2 trillion in equity market
capitalisation represented in the Developed Markets index, 78 percent
came from REITs.
1960s
•United
States(1960)
1990s
•Canada
(1994)
•Brazil (1995)
2000s
•Japan (2000)
•Singapore (2002)
•France (2003)
•Hong Kong (2003)
•Malaysia (2006)
•UK (2007)
2010s
•Mexico (2011)
•Pakistan
(2013)
•South Africa
(2013)
Legislative
framework in place
•China
•India
•Spain
6. Evolution of REITs in India
In 2007 SEBI formally introduced the draft REITs regulations for public comments.
Because of downturn in the market during that period, no further development took place in the
REITs regulation, until October 2013 when
a second draft of the regulations was issued for public comments by SEBI. After taking industry
amendments to regulations were made and the draft was approved allowing setting up and listing
of REITs. Post the clarifications provided in the 2014 budget, a final draft was introduced by SEBI in
August 2014.
S.NO Country No. of
RE/MAX Gujarat
REITs
Market Size
(USD billion)
inputs,
Percentage of
global REITs
Market
REITs performance as per S&P Dow Jones (Annual
return in
Percent)
5years 10
years
1 United States of
America
163 621 57.68 23.80 9.58
2 Australia 52 86 8.33 18.11 5.10
3 France 37 68 6.33 20.74 16.46
4 Japan 41 64 5.98 14.84 7.78
5 United Kingdom 23 49 4.55 18.52 N.A.
6 Singapore 32 45 4.23 22.04 15.09
7. REITs advantages to different stakeholders
1. Improves liquidity in the sector 1. Help improve government's revenue
2. Capital raising REITs opportunity advantages for to mid-different tier stakeholders
2. Funding through REITs could help
developers especially for small facilitate other key real estate policy
companies with lower/minimal credit implementation like targeting 100 smart
worthiness 1. Improves liquidity in the sector
cities
1. Help improve government's revenue
2. Capital raising opportunity for mid-tier
2. Funding through REITs could help
developers especially for small
facilitate other key real estate policy
companies with lower/minimal credit
implementation like targeting 100 smart
worthiness cities
Developers Government
REITs'
advantages
Institutional
investors
Retail
investors
1. Provides an exit opportunity for existing
PE players, developers and financial
2. Act as an alternative financing
opportunity with increase depth of Indian
real estate capital markets
3. Help attract long term investors such as
pension and insurance funds looking for
moderate risk v/s return ratio
1. Reduces ticket size for investing in real
estate sector
2. Transparent investment alternative in real
estate sector with experienced
professional and independent oversight
3. Easy entry and exit in the real estate
sector
Developers
Government
REITs’
advantages
Institutional
investors
Retail
investors
1. Reduces ticket size for investing in real
estate sector
2. Transparent investment alternative in real
estate sector with experienced
professional and independent oversight
3. Easy entry and exit in the real estate
sector
1. Provides an exit opportunity for existing
PE players, developers and financial
investors
2. Act as an alternative financing
opportunity with increase depth of Indian
real estate capital markets
3. Help attract long term investors such as
pension and insurance funds looking for
moderate risk v/s return ratio
8. Background
Exchange Board of India
(Real Estate Investment
Trusts) Regulations, 2008
Satwalekar
Committee
RE/MAX Gujarat
9
1996
Draft Securities &
1999
2002
2008
2008
2013 2014
SEBI (Mutual Funds)
Regulations, 1996,
Chapter VIA
Sub-Committee
set up by AMFI
SEBI Notification of real
estate mutual fund
schemes [REMFs]
Draft Securities &
Exchange Board of India
(Real Estate Investment
Trusts) Regulations, 2013
Securities & Exchange
Board of India (Real Estate
Investment Trusts)
Regulations, 2014
And Finance Act 2014
10. REIT
Institutional
Funds / HNI
Sponsors Investors
Unit Holders
Properties
Management Services
REIT
Management
Company
Management Fees
Property
Management
Company
Trustee
Maximum 75% Minimum 25%
Investments in REIT Units
Acts on behalf of Unit Holders
Trustee Fees
Services
Fees
REIT Mechanism
11. REIT Structure with Borrowing
Assets
Liabilities
Capital
Invested Assets
(Real Estate, etc.)
Tenant
Financial
Institution
(Lender)
Unit holders
Broker
Stock Exchange
Unit holders
Real Estate Investment
Advisor [Asset Manager]
Investment
Rent
Lease
Contract
Borrowing
Interest
Repayment
Investment
Dividend
Execution
Asset
Management
12. REIT Structure with SPV
Unit Holders
REIT
Indian Asset
Company [SPV]
Indian Real
Estate Assets
Trust
Management Co.
(the manager)
Indian
Promoters
Trust Services
Co. (the trustee)
Services Company
(Property
Manager)
Management
Services Co.
Acts on behalf of
unit holders
(Individual Property
Manager)
Ownership of Units Distributions
Management Fees
Management
Services
Trustee ‘s Fees
Ownership > 50%
Dividends and/or interest
Nominates Individual
Property Manager
Ownership
Rental Income
14. Salient Features
In order to encourage set of REITs in India, SEBI has issued SEBI
(Real Estate Investment Trusts) Regulations, 2014. Pursuant to the
regulations, the following are the salient features of REIT:
REITs shall be set up as a trust and registered with SEBI. It shall
have parties such as Trustee, Sponsor(s) and Manager.
The trustee of a REIT shall be a SEBI registered debenture trustee
who is not an associate of the Sponsor/manager.
REIT shall invest in commercial real estate assets, either directly
or through SPVs. In such SPVs, REIT shall hold or proposes to hold
controlling interest and not less than 50% of the equity share
capital or interest. Further, such SPVs shall hold not less than 80%
of its assets directly in properties and shall not invest in other
SPVs.
RE/MAX Gujarat
15
15. Salient Features
Once registered, the REIT shall raise funds through an initial offer.
Subsequent raising of funds may be through follow-on offer, rights
issue, qualified institutional placement, etc.
The minimum subscription size for units of REIT shall be Rs 2 lakhs.
The units offered to the public in initial offer shall not be less than 25%
of the number of units of the REIT on post-issue basis.
Units of REITs shall be mandatorily listed on a recognized Stock
Exchange and REIT shall make continuous disclosures in terms of the
listing agreement. Trading lot for such units shall be Rs 1 Lakh.
RE/MAX Gujarat
16
16. Salient Features
For coming out with an initial offer, the value of the assets
owned/proposed to be owned by REIT shall be of value not less than Rs 500
crore. Further, minimum issue size for initial offer shall be Rs 125 crore.
A REIT may have multiple sponsors, not more than 3, subject to each
holding at least 5% of the units of the REIT. Such sponsors shall collectively
hold not less than 25% of the units of the REIT for a period of not less than
3 years from the date of listing. After 3 years, the sponsors, collectively,
shall hold minimum 15% of the units of REIT, throughout the life of the
REIT.
RE/MAX Gujarat
17
17. Salient Features
Not less than 80% of the value of the REIT assets shall be in completed and
revenue generating properties.
Not more than 20% of the value of REIT assets shall be invested in
following:
i. developmental properties,
ii. mortgage backed securities,
iii. listed/ unlisted debt of companies/body corporates in real estate sector,
iv. equity shares of companies listed on a recognized stock exchange in
India which derive not less than 75% of their operating income from
Real Estate activity,
v. government securities,
vi. money market instruments or Cash equivalents.
However investments in developmental properties shall be restricted to
10% of the value of the REIT assets.
A REIT shall invest in at least 2 projects with not more than 60% of value
of assets invested in one project. Detailed investment conditions are
provided in the Regulations.
RE/MAX Gujarat
18
18. Salient Features
REIT shall distribute not less than 90% of the net distributable cash
flows, subject to applicable laws, to its investors, at least on a half
yearly basis.
REIT, through a valuer, shall undertake full valuation on a yearly basis
and updation of the same on a half yearly basis and declare NAV within
15 days from the date of such valuation/updation.
The borrowings and deferred payments of the REIT at a consolidated
level shall not exceed 49% of the value of the REIT assets. In case such
borrowings/ deferred payments exceed 25%, approval from unit
holders and credit rating shall be required.
Detailed provisions for related party transactions. valuation of assets,
disclosure requirements, rights of unit holders, etc. are provided in the
Regulations. However, for any issue requiring unit holders’ approval,
voting by a person who is a related party in such transaction as well as
its associates shall not be considered.
RE/MAX Gujarat
19
20. Regulatory framework
Salient features of the Regulatory Framework are as under:
Structure of the REIT
The REIT shall be set up as a Trust under the provisions of the
Indian Trusts Act, 1882. REITs shall not launch any schemes.
The REIT shall have parties such as trustee (registered with SEBI),
sponsor, manager and principal valuer.
Registration of REIT
The Trust shall initially apply for registration with SEBI as a REIT in
the specified format. It shall fulfill eligibility criteria as specified in
the draft Regulations.
SEBI, on being satisfied that the eligibility conditions are satisfied,
shall grant the REIT certificate of registration.
RE/MAX Gujarat
21
21. Regulatory Framework
Offer of units to the public and listing of units
After registration, the REIT shall raise funds initially 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 units of the
REIT shall continue to be listed on the exchange unless delisted
under the Regulations. Provisions for delisting have also been
specified in the Regulations.
For coming out with initial offer, it has been specified that the size
of the assets under the REIT shall not be less than Rs. 500 crore
which is expected to ensure that initially only large assets and
established players enter the market.
Further, minimum initial offer size of Rs. 125 crore and minimum
public float of 25% is specified to ensure adequate public
participation and float in the units.
RE/MAX Gujarat
22
22. Offer of units to the public and listing of units [contd.]
General procedure for initial/follow-on offer, filing of offer
document/follow-on offer document, allotment and listing of units
has been specified in the Regulations. Detailed disclosures required
in the offer document/follow-on offer document have also been
specified in the Regulations.
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 lakhs and the unit size shall be Rs. 1 lakh.
RE/MAX Gujarat
23
Regulatory Framework
23. Regulatory Framework
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% of the value of the REIT assets shall be in
completed revenue generating properties. In order to provide flexibility, it has been allowed
to invest the remaining 10% in other assets as specified in the proposed Regulations.
To ensure regular income to the investors, it has been mandated to distribute at least 90% 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, wherein such special purpose vehicles (SPV) hold not less than 90% 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
jeopardized.
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.
Investment upto100% of the corpus of the REIT has been permitted in one project subject to
the condition that minimum size of such asset is not less than Rs. 1000 crores.
Other detailed investment conditions are provided in the proposed Regulations.
RE/MAX Gujarat
24
24. Regulatory Framework
Related Party Transactions [RPT]:
All related party transactions shall be on an arms-length basis, in the best interest
of the investors, consistent with the strategy & investment objectives of the REIT
and shall be disclosed to the exchanges and investors periodically in accordance
with the listing agreement and the proposed Regulations.
Stringent conditions have been imposed on related party transactions including
detailed disclosures, valuation requirements, approval from majority of investors,
related party abstaining from voting, restrictions on leasing of assets to related
parties, requirement of fairness opinion for lease, etc.
For any related party transactions for acquisitions/sale of properties, valuation
reports from 2 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.
RE/MAX Gujarat
25
25. Borrowings and deferred payments
To avoid excessive leverage, the aggregate consolidated borrowings and deferred
payments of the REIT have been capped at 50% of the value of the REIT assets. If
the same exceeds 25%, requirement of credit rating from a credit rating agency
and approval of majority of investors has been specified.
Valuation of assets
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 updation in the valuation capturing key
changes in the last six months has also been specified. Consequently, the NAV
shall be declared at least twice in 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%/ not more than 110% of the assessed value of the
property for sale/purchase of assets respectively.
RE/MAX Gujarat
26
Regulatory Framework
26. Rights of investors
In order to ensure safeguarding of interests of the investors, several rights have
been provided to the investors in order to empower them.
The investors shall have right to remove the manager, auditor, principal valuer,
seek delisting of units, apply to SEBI for change in trustee, etc.
Further, 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 & 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% of
the REIT assets, borrowing exceeding 25%, 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.
RE/MAX Gujarat
27
Regulatory Framework
28. Taxation of REIT
RE/MAX Gujarat
29
Business Trust
[REITs]
Interest
From SPV
Exempt u/s
10(23FC)
SPV not required to
deduct TDS
Distributed to
profit holders
TDS deductible
by Trust
For Resident – 10%
For Non-Resident – 5%
Dividend from
SPV
Exempt in the
hands of Trust
SPV will not
pay
Distributed to
Unit Holders
No requirement
of DDT
Capital Gains
Sale of shares
of SPV/Real
Estate Assets
Taxable as LTCG/STCG
in the hands of Trust
Distributed to Unit Holders
Other Income of
Trust
Taxable in the
hands of Trust
At maximum
marginal rate
[30%]
Distributed to Unit Holders
29. Taxation of REIT
Taxation of Interest Income of REIT:
The income by way of interest received by REIT is given
pass through treatment i.e., there is no taxation of such
interest income in the hands of the trust.
Attention is invited to section 10 (23FC) of the Income Tax
Act which provides that any income of REIT by way of
interest is exempt from tax.
However, pursuant to section 194LBA, withholding tax at
the rate of 5 per cent is applicable in case of payment of
interest component of income distributed to non-resident
unit holders and 10 per cent is applicable in respect of
payment of interest component of distributed income to a
resident unit holder.
RE/MAX Gujarat
30
30. Taxation of REIT
Taxation of Dividend Income:
The dividend received by REIT shall be subject to
dividend distribution tax at the level of SPV.
Accordingly, such dividend is exempt from tax in the
hands of the trust.
Taxation of Capital Gains:
The income by way of capital gains on disposal of
assets by the trust shall be taxable in the hands of the
trust at the applicable rate.
RE/MAX Gujarat
31
31. Taxation of REIT
Taxation of Other Income:
As per section 115UA, any income of the trust other than interest,
dividend and capital gains shall be taxable at the maximum marginal
rate.
TDS u/s 194LC:
In case of external commercial borrowings by REIT, the benefit of reduced rate
of 5 per cent tax on interest payments to non-resident lenders shall be
available on similar conditions, for such period as is provided in section 194LC
of the Act.
Filing of Return of Income:
Pursuant to section 139 (4E), all REITs are required to file return of
their income compulsorily.
RE/MAX Gujarat
32
33. Taxation of Unit Holders
RE/MAX Gujarat
34
Unit Holders
Dividend from
REIT
Exempt
Capital Gains
Distributed by
Trust
Exempt
Sale of Units
LTCG-Exempt
(subject to STT)
Interest from REIT
STCG taxable at 15%
Taxable
Trust will
deduct TDS
For non-residents – 5%
For Residents – 10%
34. Taxation of Unit Holders
Taxation of Capital Gains on Transfer of Units of REIT:
The listed units of a business trust, when traded on a recognized
stock exchange, would attract same levy of securities
transaction tax (STT), and would be given the same tax benefits
in respect of taxability of capital gains as equity shares of a
company.
Accordingly, long term capital gains on transfer of units of REIT
would be exempt from tax in the hands of unit holders while the
short term capital gains would be taxable at the rate of 15% u/s
111A of the Act.
RE/MAX Gujarat
35
35. Taxation of Unit Holders
Taxation of Distribution of Interest Income of
REIT:
Pursuant to section 115UA, if in any previous year, the
distributed income or any part thereof received by a
unit holder from REIT is of the nature of interest
income in the hands of REIT, such distributed income
or part thereof shall be considered as income of unit
holder and shall be chargeable for tax as income of
the said previous year.
RE/MAX Gujarat
36
36. Taxation of Unit Holders
Taxation of Distribution of Dividend Income of REIT:
Section 10 (23FD) of the Income Tax Act provides that any
distributed income received by a unit holder from REIT is
exempt from tax except the income received which is in
the nature of interest income in the hands of REIT.
Accordingly, the distribution of dividend income of REIT to
unit holder is exempt from tax in the hands of unit holder.
Taxation of Distribution of Capital Gains of REIT::
Since REIT is already charged for tax on the income of
capital gains, unit holder is exempt from tax on account of
distributed income of REIT from its capital gains.
RE/MAX Gujarat
37
37. Taxation of Unit Holders
Taxation of Distribution of Other Income of REIT:
Pursuant to section 10 (23FD) of the Income Tax Act,
any distributed income received by a unit holder from
REIT is exempt from tax except the income received
from interest income in the hands of REIT.
Accordingly, the distribution of any other incomes of
REIT to unit holder is exempt from tax in the hands of
unit holder.
RE/MAX Gujarat
38
39. Taxation of Sponsor
RE/MAX Gujarat
40
Transferor / Sponsor
Exchange of shares of SPV with
units of the Trust
At the inception
It is not a taxable transfer
Subsequent disposal of units
of the Trust
Acquired by way of exchange of
shares
Taxable as Capital Gains
40. Taxation of Sponsor
Meaning: Sponsor means any person and its associates, if any, who
sets up the REIT and assigned as such at the time of application
made to SEBI and who holds not less than 25% of the units of REIT
at the time of making application for registration to SEBI.
Sponsor may assign its own properties to REIT against the
allotment of units of REIT as consideration.
The capital gains arising to the sponsor at the time of exchange of
shares in SPVs with units of the business trust shall be deferred and
taxed at the time of disposal of units by the sponsor only.
For this purpose, an exemption has been introduced by virtue of
clause (xvii) of section 47 which provides that any transfer of
capital asset being share of a SPV to REIT in exchange of units of
REIT shall not be regarded as transfer and hence no capital gains is
chargeable.
RE/MAX Gujarat
41
41. Taxation of Sponsor
However, the preferential capital gains regime (consequential
to levy of STT) available in respect of units of business trust
will not be available to the sponsor in respect of these units
at the time of disposal.
Accordingly, sponsor cannot claim the benefit of exemption
of LTCG as envisaged in section 10 (38) and of reduced tax
rate of 15% on STCG as envisaged u/s 111A of the Act.
Further, for the purpose of computing capital gain, the cost of
these units shall be considered as cost of the shares to the
sponsor.
Besides, the holding period of shares shall also be included in
the holding period of such units.
RE/MAX Gujarat
42
43. Responsibilities of various parties to the REIT
Responsibilities of the Trustee
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 in accordance with the Trust Deed and the proposed
Regulations. The role of Trustee is primarily supervisory in nature.
The Trustee shall ensure that the activity of the REIT is being
operated in accordance with the proposed Regulations. For
achieving the same, certain specific obligations are also imposed
on the Trustee, details of which have been provided in the
proposed Regulations.
The right and obligation to convene meetings of the investors shall
lie with the Trustee and he shall follow procedures for holding such
meetings as specified in the proposed Regulations.
RE/MAX Gujarat
44
44. Responsibilities of the Manager
The manager shall primarily assume all the operational responsibilities
with respect to the activity of the REIT. Roles and responsibilities of the
manager shall be specified in the agreement entered into between the
trustee and the manager.
To ensure that the activities of the REIT are managed professionally, it
has been specified that the manager needs to have atleast 5 years of
related experience coupled with other requirements such as minimum
networth, manpower with sufficient relevant experience, etc.
Responsibilities of manager shall range throughout the life of the REIT
right from the application for registration, issue and listing of units of
REIT, day to day operation and management of the assets of REIT till
the delisting of units, if any. Manager shall be responsible for various
operational aspects including appointment of various parties to the
REIT, procedural aspects of issue and listing of the REIT units,
investment decisions, disclosures and reporting, distribution of
dividends etc.
RE/MAX Gujarat
45
Responsibilities of various parties to the REIT
45. Responsibilities of sponsor and the valuers
The sponsor’s responsibilities shall primarily pertain to setting
up of the REIT including appointment of the Trustee. The
sponsor shall also be obligated to maintain a certain percentage
holding in the REIT to ensure a ‘skin-in-the-game’ 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.
Further, a minimum net worth and experience criteria have also
been laid down for the sponsor in the proposed Regulations.
For ensuring fair and transparent valuation of the assets, the
valuers have been obligated to follow valuation principles, have
robust internal controls, have manpower with sufficient relevant
experience, etc.
RE/MAX Gujarat
46
Responsibilities of various parties to the REIT
46. How this will help real estate industry?
Big will be bigger
Liquidity for big commercial projects
Small investors can participate
Value can be unlocked
More transparency
RE/MAX Gujarat
47. Benefits for small real estate players
A REIT can invest in small properties also which are
pre-leased.
However properties need to be 100% clear
100% white money
Diversification requires all REIT to have their assets
in multiple geographies and / or different type.
Overall good for real estate Industry
RE/MAX Gujarat