Gujarat October 30, 2013: Real estate sector is the second largest employment provider in the country next to Agriculture sector. The growth in the real estate sector has been phenomenal in the last decade. Real estate is among the most influential sector as it is associated with almost every sector in the country. As, the land and infrastructure is the invincible factor of production, the rise in the real estate sector witnesses rise in the other important sectors. The demand for commercial spaces has increased manifold due to growing industrial operation in the country. In spite of all these brownie points the sector has been continuously ignored by the government to make it organized and investor friendly. As a result, real estate sector is at the crossroads of a shortage of financing options, high backlog coupled with difficulties in project conception to development due to various policy and legal bottlenecks. The biggest among such hurdle is lack of capital as the banks are keeping away from financing the developers due to high risks involved; The entry and exit norms under the current FDI regime are making the situation even grimmer.
On 10th October 2013, SEBI has again come out as a savior to realty sector with the draft regulations on Real estate investment trusts (also known as “REIT’s”) like in 2008 but this time with much more intent and positivity to revamp the sector with much needed capital.
The idea of introducing the REIT’s in India had gained popularity when SEBI came out with the draft guidelines in 2008 but unfortunately it could not sustain as was surrounded with issues such as lack of transparency and taxation. As the business community has been pushing SEBI for introduction of such structure, there were predictions of SEBI coming up with a new Category IV under SEBI’s Alternate Investment Fund regulations or like 2008, with a separate devoted regulatory system for REIT’s in India.
In past the capital market regulator had been instrumental in noticing the problem associated with realty sector and acknowledged the huge potential for the sector. Hence certain steps were taken by SEBI to revamp capital in realty sector. In 2004 SEBI allowed private equity participations in real estate companies through VCF regulations which are now replaced with AIF regulations which have much more stringent barriers in terms of amount of investors and the investment. Subsequently in 2008, SEBI amended Mutual Fund Regulations to launch direct investment by mutual funds in real estate assets. But nothing substantial has happened in this sector as the regulations requires that the net asset value of every real estate mutual fund scheme shall be calculated and declared at the close of each business day. These attempts by capital market regulator till now have been fruitless and could not manage to revamp the sector with much needed capital.
Acknowledging scarcity of options of investment in the realty sector as compared to other developed countries such as USA, Australia, and Singapore, SEBI seems to moving on to better options of investment and structure by providing a transparent and robust regulatory framework for REIT’s. REIT’s are nothing but a collective investment vehicle that pool capital from investors and then through professional managers the pooled capital is invested in variegates forms commercial real estate assets. Investment in REIT’s often yield rental income from such assets, the income then is distributed among investors at a fixed rate. In simple words it is an investment structure which not only gives opportunity to small investors to invest in small clusters, but also gives a guaranteed return unlike a company. Generally, REIT’s raise capital by issuing units of investment schemes through public offer similar to an IPO and then list those units on a stock exchange the capital raised then can be invested in developed projects having a certificate from local authority. Similar to shares the units of such investment schemes then can be traded on exchanges. Listed REITs provide liquidity thus providing easy exit to the investors and developers. REIT provides investor a safe option of investment yielding fixed and regular returns unlike investment in under-construction properties where the risk is relatively high. Typically, REIT’s are tailor made for investment in rental income schemes also called as stabilized assets. The business community in India is very positive about introduction of REIT’s as it pumps the industry with much needed capital though along with a strong robust regulatory systems like companies.
The proposed regulations are based on global standard best practices. As per the proposed draft regulations the REIT’s will be established as trust under Indian Trust Act with a mandatory requirement to be registered with SEBI along with its trustees and getting listed under the proposed draft regulations. The regulations mandate initial asset size of not less than Rs. 1000 Crores and initial offer size of Rs. 250 crore and minimum public float of 25% is specified to ensure adequate public participation which means only blue chip players will enter the segment. As per the regulations, the units of the REITs may be offered only to HNIs/institutions and the minimum subscription size is Rs. 2 lakhs and the unit size is kept at Rs. 1 lakh. It has been mandated to distribute atleast 90% of the net distributable income after tax of the REIT to the investors which very lucrative for investors. Initially small investors may not get chance to invest in REIT’S as SEBI is deliberating upon investment from healthy balance sheet investors considering the risk involved. Once the structure is tested in market the small investors will be allowed to invest in REIT’S. Unlike PE fund or mutual funds, the REIT’s have completely asset dedicated structure with no diversification requirements. SEBI’s noble endeavors to introduce the REIT structure will depend upon favorable tax regime like in Singapore, exemption from stamp duties and route for foreign investors to invest in such structures. For the first time REIT will bring the benefits of commercial real estate assets to majority of investors, the benefits which were available only to wealthy individuals. The draft proposed regulations are based on global standard best practices which include meaningful dividends, portfolio diversification, valuable liquidity, enviable transparency, accountability and competitive performance.
At times when the market is filled with scandals and scams and poor business practices, REITS with its good corporate governance along with openness in financial reporting may become victorious in achieving the investor confidence. But the success of the REIT will depend upon conducive tax regime, simultaneous change in FDI policy, speedy computerization of land records, exemption from stamp duty, minimal property and service tax and important among all establishment of regulatory body at the earliest. However, no matter what the hurdles are, SEBI should this time take the bull by the horns and get this job done.
(GNLU-CCEL) Research Fellow in Real Estate Laws at Gujarat National Law University, Gandhinagar. CCI Newswire
