Why India needs REITs?
A real estate investment trust (REIT) is a fresh investment mechanism being planned by the Securities and Exchange Board of India (SEBI). A REIT manages and owns income-generating developed property and is intended to offer common units to the public as an option for investment. These units represent ownership in the business of managing income-producing properties. REITs will make available away to real estate developers to commercialise developed property, providing an exit path. It will also provide overleveraged companies an opportunity to deleverage. It will escalate the depth of the Indian real estate market and provide additional liquidity.
Also, REITs would enable people to channelise their investments into the sector through a structured mechanism. Bearing in mind the current economic slowdown and scarcity of funds, REITs are projected to infuse a fresh lease of life into an otherwise irregular market.
Irregular Road to REITs
The draft SEBI (Real Estate Investment Trusts) Regulations, 2013, seem well thought out. Nevertheless, much is sought after to make the REIT structure commercially viable. The obvious and much-discussed road blocks are taxation of REITs, foreign investments in REITs and stamping of agreements relating to transfer of property to the REITs. In addition to these tentative blocks, there is a need to fix the following issues to make the REIT regulations workable.
One of the basic grounds of the draft REIT regulations is the need to provide an exit avenue and liquidity. But, the definition of “real estate” seems rather bound. The definition of “real estate” or “property” should be widened to include all commercial and residential property and completed infrastructure assets such as roads and highways that have a regular income flow.
Open Realty to Reality
Presently, the least asset value of a REIT is marked at Rs 1,000 crore. While there is a need for confirming financial soundness of the trust, one cannot argue the fact that such a threshold will eradicate many small players. This can be reconciled by providing for the concept of co-sponsors, much like the mutual fund regulations. This would permit companies with a smaller portfolio to come together and set up a REIT. Further, transparency should be provided on the pricing and repurchase of unit along the lines of mutual fund regulations.
In last few years, Limited Liability Partnership (LLP) has appeared as a preferred vehicle for real estate developments owing to the various benefits due to it. The investment conditions with respect to REITs should be relaxed to permit investment in LLPs that house real estate assets, and the definition of “special purpose vehicle” and “body corporate” can be revised to include LLPs, thereby allowing real estate investments in LLPs that own real estate assets.