The market regulator
SEBI (Securities and Exchange Board of India) has released its
consultative guidelines for operation of REITs in India after five years of
delivering its first draft. The statement clearly spells out the need for REITs
implementation in India at the earliest, considering the huge popularity of
this real estate investment platform across the world.
In fact, the entire
REIT framework was more or less withdrawn after the 2008 draft to make way for
REMFs - which eventually did not materialise either. The current draft is open
for public comments until 31st October 2013.
The eligibility
criteria for REITs that have been spelled out suggest that initially, only
large and established asset management firms can participate. The minimum asset
size of REITs should be Rs. 1,000 crore.
The REIT shall have
parties such as trustee (registered with SEBI), sponsor, manager and principal
valuer. To begin with, all REIT schemes will have to be close-ended real estate
investment schemes that will invest in real estate with an aim to provide returns
to unit holders.
Returns will be
derived mainly from rental income or / capital gains from real estate. The
minimum size of an initial public issue will not be less than Rs. 250 crore, of
which at least 25 % has to be publicly floated.
Low leverage and
limited participation seem to be the initial safeguards. While the 25 % public
float criteria exists, SEBI has limited participation in REIT IPO to HNIs and
institutions until the market develops fully.
Thus, the minimum
ticket size for investment is kept at Rs. 2 lakhs. Also, in order to safeguard
against over-leverage, the borrowing limit for REITs is limited to 50 % of the
asset size.
If the borrowing
limit crosses 25 %, an approval must be sought from investors and a credit
rating must be obtained from a reputed rating agency. Also, any transaction
that exceeds 15 % of the asset value needs investor approval.
These guidelines
amplify in some greater detail what was shared in the previous draft. The good
news is that the regulator has clearly expressed its willingness to kick-start
REITs in India at the earliest.
The cautious approach
adopted by SEBI during this initial period is acceptable and appreciable. One
concern is with regards to the strengthening of our legal framework surrounding
real estate in India, which is a pre-requisite for REITs to thrive here.
The Real Estate
Regulatory Bill, which was approved by the Union Cabinet in June 2013, was
therefore a move in the right direction.
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