Sebi sets the ball rolling on Indian Reits

Sebi sets the ball rolling on Indian Reits

Mumbai: Transparency in India’s real estate sector is set to go up once draft regulations, released on Friday by the Securities and Exchange Board of India (Sebi) on real estate investment trusts, or Reits, come into force, say developers and industry analysts.

The move will also allow more retail, or individual investors, to participate more widely in India’s rapidly growing real estate sector.

Sebi is seeking industry comments on the proposed regulations by 10 January.

A Reit provides investors in real estate investors a structure very similar to what mutual funds provide for investing in shares. A Reit is a corporation or trust that uses the pooled capital of many investors to purchase and manage income-yielding property or mortgage loans. Reits are traded on stock exchanges.

The main focus of the proposed regulation is on valuation of properties. Valuation reports for Reits can only be prepared by entities approved by Sebi and in accordance with its norms. In 2006, Sebi held back share offerings of several real estate companies because of inflated valuations.

The regulations will also make it mandatory for Reits to disclose their valuation methodology as well as the basis of valuation. Each scheme must be appraised by an appraisal agency, rated by a credit rating agency and valued by a qualified valuer, all of whom have to be pre-approved by the regulator.

The regulator has also proposed banning Reits from investing in land and property development. They can only invest in already developed properties that earn a rental income.

“This clearly segregates the space between private equity (PE) investors and Reits. While a PE fund will invest in land acquisition and property development with a long-term investment perspective, Reits will invest in leased properties only," notes Anuj Puri, chairman, Jones Lang Lasalle Meghraj, a real estate consultant firm.

Adds Ambar Maheshwari, director, investments, at DTZ, another real estate consultant firm: “Reits will become the exit option for developers and investment funds."

Sebi has also proposed to cap a Reit’s exposure to 15% of a single real estate project and 25% of all the real estate projects developed, marketed, owned or financed by a single group of companies.

The draft regulations say that the net asset value (NAV) of each Reit will have to be disclosed as per Sebi regulations. However, the frequency of such disclosures is not noted in the draft regulations. Mutual funds disclose their NAV daily.

Sebi has allowed commercial banks and insurance companies to list Reits. This is likely to benefit public sector entities, such as Life Insurance Corp. of India, and other state-owned insurance firms that own large amounts of leased properties.

The draft regulations say that Reits must distribute up to 90% of their net income each year, after paying tax. This essentially means that both the investors as well as real estate asset management firms will pay tax.

Income from Reits in the US and Australia, for instance, are taxed at the hands of the unit holder, or the investor, only.

So far, only Ascendas, a Singapore-based developer, has listed a Reit on Indian lease income properties in Singapore. Two Indian developers, DLF Assets Ltd and Unitech Developers Ltd, are in the process of preparing to listing their Reits in Singapore.

Kumar Gera, chairman of Confederation of Real Estate Developers Association of India, an industry lobby, said Reits would also open up the market for rental housing in India and offer developers a relief from the pressure of selling off properties before completing development.

Sebi’s draft regulations says Reits can only have close-ended schemes and listing of all schemes will be mandatory.