What Is A Real Estate Investment Trust – REIT
The Indian real estate sector has been a lucrative investment option for savvy investors being the 2nd most prominent income generating sector after agriculture.
REIT allows even the small budget investors to make a safe and a rewarding investment.
A real estate investment trust, or REIT, is a company that owns, operates or finances income-through real estate. REITs are traded on major exchanges and provide investors with a liquid stake in real estate.
How do REIT works?
Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) are mediums thru which private investment in infrastructure and real estate can be made. It allows for individual investors with a small sum of Rs 2 lakhs, to secure units in exchange. The money thus collected is pooled into a REIT fund whereby investors acquire ownership in commercial real estate portfolios that receive income from properties such as apartment complexes, office buildings, hotels and shopping malls. Capital gains accruing from the sale of the commercial assets are distributed to an investor in a way where 90% of income is distributed as dividends to investors.The size and structure of a REIT
The SEBI board has kept the minimum asset sizes to be invested in, at Rs 500 Crores. However, the minimum issue size would have to be less than Rs 250 Crores. As with stocks, the investors will be able to buy the units from either primary and/or the secondary markets. REITs is structured as trusts where assets are held with independent trustees for investors.REIT Categories
Equity REITs- The majority of REITs are publicly traded whereby REITs own or operate income-producing real estate. Mortgage REITs – mREITs provide financing for the income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments. Public non-listed REITs – PNLRs are registered with the SEC but do not trade on national stock exchanges. Private REITs – Private REITs are offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges.REIT Guidelines in India
| Investment Guidelines in India | REIT has to invest at least 80% of its total assets in completed and rent-generating real estate, with a lock-in period of 3 years A maximum of 20% of the total value of REITs can be from: |
| Fundraising through public offer of units | Minimum value of REIT assets: INR 500 crore Slabs for minimum offer size If post issue capital < NR 1,600 crores – minimum 25% or INR 250 Crores, whichever is higher |
| If post issue capital =/> INR 1,600 Crores but < INR 4,000 crores – minimum INR 400 Crores If post issue capital =/> INR 4,000 Crores but < INR 4,000 crores – minimum 10% | |
| Minimum offer size: INR 250 crore Minimum subscription amount: INR 10 lakh Trading lot: INR 5 lakh Minimum number of unitholders (other than sponsors or related parties): 20 | |
| Fundraising through private placement of units | Minimum value of InvIT assets: INR 500 crore Minimum offer size: INR 250 crore Minimum subscription amount: INR 1 crore |
| Trading lot: INR 1 crore Minimum unit holders (other than sponsors): 5 Maximum unit holders (other than sponsors): 1,000 |
Listing Requirements
Minimum number of subscribers
Distribution policy
Terms in use
| Real estate | Rent/income generating hotels, hospitals and convention centers Common infrastructure for composite real estate projects, industrial parks and special economic zones |
| Sponsors | Minimum holding of 5% of total units of REIT with a maximum of 3 sponsors A single or group entity with a net worth of min INR 100 Crores with each sponsors’ network of at least 20 Crores Minimum experience of 5 years in the development of real estate or real estate fund management Track record of at least two completed projects |
| Manager | A corporate or a company with minimum net worth of 10 crore Minimum experience of five years in fund management/advisory/property management A minimum of two key personnel with five years’ experience |
| Manager’s Duties | Who ensures that a REIT has a proper legal, binding and marketable titles Identify and recommend investment opportunities Comply with conditions and strategy mandatory for investment Appointing other service providers in consultation with trustee Ensuring that REIT’s assets are adequately insured Addressing grievances and distribution-related issues of unitholders’ |
Ensuring annual audit of REIT’s accounts by an auditor Overseeing developmental activities Providing activity and performance reports on a REIT every three months to its board or governing board Ensuring adequate disclosure and timely submission of documents to the concerned stock exchange Maintaining records pertaining to activities of a REIT for a minimum period of seven years | |
| Trustee | Hold REIT assets in the name of REIT for the benefit of unitholders Registered with SEBI, and not related to the sponsor or manager Should not be an associate of sponsor/ manager Registered with SEBI, and not related to the sponsor or manager |
| Duties of a Trustee | Appointing a manager Overseeing the manager’s activities and operations and obtaining compliance certificates on a quarterly basis Reviewing related party transactions Obtaining unit holders’ approval on specified matters |
| Valuer | A CA/CS/Cost Accountant/ Merchant Broker registered with SEBI who undertakes financial and technical valuation. |
| Strategic Investo | A category of investors Who together invest not less than five percent of the total offer size. This is to mainly instil confidence in the other investors and includes: An infrastructure finance company registered with RBI as a Non-Banking Financial Company Scheduled Commercial Bank Non-Banking Financial Companies registered with Reserve Bank of India Foreign portfolio investors |
| Valuation | Complete valuation of a REIT taken up at least once every financial year Valuation to be undertaken from a financial as well as technical perspective Minimum experience of a Valuer should be five years Not related to or associated with the relevant REIT parties Half-yearly valuation of REIT assets Complete valuation to be undertaken– If The acquisition price is more than 110% of the valuation The sale price is less than 90% of such valuation |
Revenue of REIT is derived from the following
SPVs
SEBI board allows REITs to invest at least 50% of equity share capital, or interest in special purpose vehicles (SPVs), or holding companies of the SPV and vice-versa.
Benefits of REIT:
To Investors
To Business
To Economy
Don’t hesitate to write to MUDS at [email protected] or call MUDS at +91 7011198909 for Free Consultation !
Why MUDS
MUDS is a multidisciplinary advisor with a combination of skills like auditing, tax, advisory. We have successfully undertaken floating of IPO/FPO, GDRs and ADRs, Direct listing. We are trusted partners to niche organizations delivering valuation, financial advisories and end to end management of issues and we also specialize in serving REIT clients.
We have a strong understanding conducting due diligence and seeding new issues into the market. Here are some of our services pertaining to REIT.
| Financial Due Diligence | Preparation of financial statements and financial numbers required in the offer document Preparation of opening balance sheet of the Company Assistance in preparation of operating cash flows Validation of key assumptions be presented in the offer document |
| Lead Advisory Services | Assistance in drafting responses to the regulator comment letter Preparation of opening balance sheet of the Company Evaluation of REIT as a fund raising options Assistance in setting up of quarterly close process for the REIT Internal Audits / Process Reviews NAV declaration every 6 months or lesser intervals Assistance in registration of REIT with SEBI Review of listing documents from a tax & regulatory perspective Preparation of periodic updates on the performance of the REIT to be circulated amongst the investors Review of related party transactions and future tax structure Structuring investments by the investor into the REITs |
| Issuance of New Units | Assistance in drafting of MD&A in relation to the offer document. Preparation of opening balance sheet of the Company Evaluation of REIT as a fund raising options Conducting background check of third parties |
| Valuation | Valuation of the portfolio Valuation to ascertain the fair value of the transaction / Determine lease potential of the asset and market assessment of rentals an asset can command Monetization of leased assets |
| Liasioning | Liasioning with independent accountants, auditors, appointment of valuers as applicable |
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