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Dalal Street

Real Estate Investment Trusts Closer to Reality in India

Friday, October 11, 2013

The Securities and Exchange Board of India (SEBI) has today released draft guidelines for REITs, with the following key features

1) Investors: REITs may be offered only to HNIs/institutions, resident as well as foreign. Initially, minimum subscription size shall be Rs 0.2mn.
2) Sponsors: It shall be obligated to maintain a 25% holding in the REIT for at least 3 years from the date of the listing of the REIT.
3) Which assets to own? Guidelines offer higher flexibility compared to guidelines issued in 2008, with 100% corpus can be invested in one project.
4) Size of REITs: Size of the assets under the REIT should be at least Rs10bn. Free float should be at least 25%.
5) Trading: REITs should be listed in a recognized stock exchange.
6) NAV declaration: NAV needs be declared twice a year.

While draft guidelines are a significant step forward towards domestic REITs, we believe following issues will require more clarity and can delay issuance of REITs: (1) Taxation. Whether business income earned by REIT be taxable and what will be taxation on dividend distribution, (2) foreign institutional investment into finished assets will require RBI approval, (3) Initial REITs may be of smaller size and hence illiquid, (4) how will principal valuer calculate NAV, and (5) what can be leverage at asset level


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