Issue and Listing of REIT Units in India - SEBI Rules & Regulations
Atleast 25% of the units outstanding are offered to the public provided that for initial offer greater that Rs5bn, if units are held by the public prior to initial offer, such existing units will be counted in calculation of 25%
Value of all the assets held by REIT greater than Rs5bn
The draft and final offer document shall be accompanied by a due diligence certificate signed by the Manager and lead merchant banker.
Under both the initial offer and follow-on public offer, the REIT shall not accept subscription of an amount less than Rs0.2mn from an applicant.
Units may be offered for sale to public if such units have been held by the existing unitholders for a period of at least one year prior to the filing of draft offer document with the Board (Provided that the holding period for the equity shares or partnership interest in the SPV against which such units have been received shall be considered for the purpose of calculation of one year period)
If the REIT fails to make its initial offer within three years (increased from 18months in draft guidelines) from the date of registration with the Board, it shall surrender its certificate of registration to the Board and cease to operate as a REIT (provided that the Board, if it deems fit, may extend the period by another one year)
The units of REIT will be listed on recognized stock exchange
Any person other than the sponsor(s) holding units of the REIT prior to initial offer shall hold the units for a period of not less than one year from the date of listing of the units subject to circulars or guidelines as may be specified by the Board.
Tuesday, September 30, 2014
Monday, September 29, 2014
Final Regulations Indian REIT
SEBI announced India Real Estate Investment Trust Regulations, 2014. It has made key changes in terms of investment required in completed assets, minimum size of REIT, limit on number of sponsors, and minimum number of assets requirement, in-line with the announcement in Aug’14
Key changes announced in final regulations vs. draft regulations are on minimum asset value of REIT (Rs 5bn vis a vis Rs 10bn in draft), minimum project requirement (atleast 2 projects vs. 1 in draft), limit on number of sponsors (3 sponsors vs. no cap in draft) and value required in completed projects (80% vs. 90% in draft). In addition REITs will be required to make 90% of net distributable profits on a half yearly basis.
Special purpose vehicle is defined as corporate or LLP: a) in which the REIT holds or proposes to hold controlling interest and not less than 50% of the equity share capital or interest; b) which holds not less than 80% of its assets directly in properties and does not invest in other SPVs; and c) which is not engaged in any activity other than holding and developing property. In the SPV no other shareholder/partner shall have any rights that prevent the compliance from REIT regulations. In addition SPV is required to distribute not less than 90% of distributable cash flows. There is no borrowing limit at SPV level.
While REITs have been given a pass-through status, taxes (corporate and dividend distribution) will be applicable at the SPVs controlled by REITs. In a scenario of all equity REIT investment in SPV, limited benefit of tax pass through will be available to investors as all taxes will be applicable at the SPV level. A structured investment in SPVs (Debt/Equity mix) will improve return profile by 80bps. However the yield profile is likely to be below 10 year Gsec for both domestic and foreign investors.
Key monitorable remains the expectations gap between sponsors and investors. While sponsors look to factor in the benefits of capital appreciation in the valuation of assets, investors are still skeptical on building in significant capital appreciation and would keep appreciation as option value for their investments. Lower interest rate scenario is necessary to bridge the gap.
While SEBI has largely addressed regulatory issues, certain tax related issues still need to be clarified by Ministry of Finance inorder to improve viability of REITs in India. MAT arising on revaluation during swap of units and SPV shareholding will lead to cash flow mismatch for sponsors (while actual capital gains matches realisation). In addition capital gains tax imposed on sale of assets by REITs (vs internationally exempted if gains distributed) will lead to a listing discount on NAV. Any clarity on these aspects will improve attractiveness of I-REITs for both sponsors and investors.
Key changes announced in final regulations vs. draft regulations are on minimum asset value of REIT (Rs 5bn vis a vis Rs 10bn in draft), minimum project requirement (atleast 2 projects vs. 1 in draft), limit on number of sponsors (3 sponsors vs. no cap in draft) and value required in completed projects (80% vs. 90% in draft). In addition REITs will be required to make 90% of net distributable profits on a half yearly basis.
Special purpose vehicle is defined as corporate or LLP: a) in which the REIT holds or proposes to hold controlling interest and not less than 50% of the equity share capital or interest; b) which holds not less than 80% of its assets directly in properties and does not invest in other SPVs; and c) which is not engaged in any activity other than holding and developing property. In the SPV no other shareholder/partner shall have any rights that prevent the compliance from REIT regulations. In addition SPV is required to distribute not less than 90% of distributable cash flows. There is no borrowing limit at SPV level.
While REITs have been given a pass-through status, taxes (corporate and dividend distribution) will be applicable at the SPVs controlled by REITs. In a scenario of all equity REIT investment in SPV, limited benefit of tax pass through will be available to investors as all taxes will be applicable at the SPV level. A structured investment in SPVs (Debt/Equity mix) will improve return profile by 80bps. However the yield profile is likely to be below 10 year Gsec for both domestic and foreign investors.
Key monitorable remains the expectations gap between sponsors and investors. While sponsors look to factor in the benefits of capital appreciation in the valuation of assets, investors are still skeptical on building in significant capital appreciation and would keep appreciation as option value for their investments. Lower interest rate scenario is necessary to bridge the gap.
While SEBI has largely addressed regulatory issues, certain tax related issues still need to be clarified by Ministry of Finance inorder to improve viability of REITs in India. MAT arising on revaluation during swap of units and SPV shareholding will lead to cash flow mismatch for sponsors (while actual capital gains matches realisation). In addition capital gains tax imposed on sale of assets by REITs (vs internationally exempted if gains distributed) will lead to a listing discount on NAV. Any clarity on these aspects will improve attractiveness of I-REITs for both sponsors and investors.
Wednesday, September 24, 2014
Inventory pile-up continues at NCR / Mumbai
The inventory buildup is continuing as evidenced by low absorption rates; and there is a deterioration in the mid- to high-end segment with inventory months of 48 (36 in FY13). NCR and Mumbai stand out with
average inventory months of 56 for unit sizes of >INR 3 Crore. NCR and Mumbai have 45-50 months of
unsold stock. This is mainly due to lower absorption rates and higher project launches in the past two years. For Bengaluru, inventory months are not as high as those at NCR and Mumbai, but they are still much higher than the historical average.
In some segments (at current offtake rates), we believe it may take as much as >5 years to offload the current unsold inventory. Most real-estate developers have a large portion of their portfolio in these segments, implying their absorption/operational data is unlikely to improve until they cut prices and / or launch projects in the mid-end segment
The sector’s contingent liabilities now total 43% of net worth, vs 22% in FY09. Also, gearing (including off-balance sheet risks) has increased in the past five years. We believe the increase in contingent liabilities for some companies can be justified by the potential increase in revenue (SOBHA Developers), but for others it should continue to weigh high in the daily operation of the company.
For now, we do not expect REIT listing to be a big game changer, as clarity on regulations and unattractive yields could dampen investor appetite. Also, the proposed real estate regulatory bill could further elongate the execution cycle, leading to lower ROEs and stretched cashflows.
average inventory months of 56 for unit sizes of >INR 3 Crore. NCR and Mumbai have 45-50 months of
unsold stock. This is mainly due to lower absorption rates and higher project launches in the past two years. For Bengaluru, inventory months are not as high as those at NCR and Mumbai, but they are still much higher than the historical average.
In some segments (at current offtake rates), we believe it may take as much as >5 years to offload the current unsold inventory. Most real-estate developers have a large portion of their portfolio in these segments, implying their absorption/operational data is unlikely to improve until they cut prices and / or launch projects in the mid-end segment
The sector’s contingent liabilities now total 43% of net worth, vs 22% in FY09. Also, gearing (including off-balance sheet risks) has increased in the past five years. We believe the increase in contingent liabilities for some companies can be justified by the potential increase in revenue (SOBHA Developers), but for others it should continue to weigh high in the daily operation of the company.
For now, we do not expect REIT listing to be a big game changer, as clarity on regulations and unattractive yields could dampen investor appetite. Also, the proposed real estate regulatory bill could further elongate the execution cycle, leading to lower ROEs and stretched cashflows.
Monday, September 15, 2014
Residential Demand Weak - No Acche Din Yet
Residential prices have been increasing despite weak volumes over the past 3-4 years. However, now different data points are suggesting some decline in prices in a few areas. At least the sharp price rise has moderated over the past few months. In key cities, the residential prices grew 7% YoY in 1QFY15 – deceleration from 12%-16% YoY increase seen over 2QFY12 - 4QFY13. NHB Residex for 4QFY14 shows significant deceleration in prices with 13 cities (out of 26) showing YoY decline in prices and average (unweighted) price increase of just 0.3% YoY across 26 cities
Residential absorption (area sold) in key cities of India fell 44%YoY/ 13%QoQ in 1QFY15 (Prop Equity
data). The pace of demand destruction has continued unabated. Residential absorption fell 27% YoY in FY14 with 0%/ 25%/ 36%/ 45%YoY decline in absorption in 1Q/ 2Q/ 3Q/ 4QFY14. All these data point to very weak demand environment and it appears that up-tick in GDP growth in 1QFY15 has not impacted demand yet
Commercial absorption in key cities fell 19%YoY/ 29% QoQ in 1QFY15 on an already weak base of FY13 / FY14 which had a decline of 16%YoY/ 12%YoY. High inventory (~60 months of available supply) has kept rentals in check. Rentals are flat to down (~-2%) YoY despite continuing high inflation.
Residential absorption (area sold) in key cities of India fell 44%YoY/ 13%QoQ in 1QFY15 (Prop Equity
data). The pace of demand destruction has continued unabated. Residential absorption fell 27% YoY in FY14 with 0%/ 25%/ 36%/ 45%YoY decline in absorption in 1Q/ 2Q/ 3Q/ 4QFY14. All these data point to very weak demand environment and it appears that up-tick in GDP growth in 1QFY15 has not impacted demand yet
Commercial absorption in key cities fell 19%YoY/ 29% QoQ in 1QFY15 on an already weak base of FY13 / FY14 which had a decline of 16%YoY/ 12%YoY. High inventory (~60 months of available supply) has kept rentals in check. Rentals are flat to down (~-2%) YoY despite continuing high inflation.
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