Current status of REITs and The Legalities involved behind it

Sanjay Israni

Traditional Indian investors have historically relied on investments in real estate, fixed deposits, life insurance and gold which provided stable and secure returns. Over the years, the Indian financial market has evolved and technology and digitisation have provided various options coupled with ease of investment in the form of equity, debt, derivatives, mutual funds, gold and commodities ETFs etc. Investors have also enthusiastically responded to these new products by diversifying their portfolios into these financial instruments.

In the absence of real estate-related financial instruments, except equity shares of real estate listed companies and limited REITs in recent times,investors had no option but to invest in real estate by way of physical acquisition which involved huge capital and risks associated with owning,operating and maintaining properties. Further, such investments are more individualistic or family-oriented without any collective investment by third parties or stakeholders, though real estate AIFs provide investment opportunities, but these are mainly limited to high-net-worth individuals.

This all may now change post the proposed changes in the SEBI (Real EstateInvestment Trusts) Regulations, 2014. The proposal to allow Small and Medium REITs with an asset value of INR 50 Crore may act as a game changer for the developers and real estate managers mainly in Tier 2 and 3 cities where these assets can be developed and then owned and held by REITs offering higher returns to the small investors enabling fractional ownership in these realestate assets through REIT units. Over a period of time, a new ecosystem will evolve where small developers and real estate fund managers will be able to garner financial resources from investors to fund small developers of commercial assets in Tier 2 and 3 cities.

REITs presently allowed by SEBI own, operate and manage a portfolio of income-generating real estate assets (hotels, hospitals and convention centres, forming part of composite real estate projects, whether rent generating or income generating) which have a minimum asset value of INR 500 Crore. SEBI has tested the waters with established market players like Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real EstateTrust and now wants to extend this instrument to smaller players in the realestate industry and the retail investors.

REIT structure presently includes a Sponsor, who sets up a REIT, a Trustee who holds the REIT assets in trust for the benefit of the unit holders and a Manager which can be a company, an LLP or a body corporate that manages assets and investments of the REIT. SEBI will suitably amend the present regulations and provide structural relaxations for small and medium REITs with respect to specified criteria and obligations of investment managers.

Currently, there are 5 listed REITs with operating assets in markets of Delhi, Bengaluru, Mumbai, Pune, Hyderabad and Chennai and these are liquid instruments easily tradable on the stock exchanges.