Real Estate Investment Trusts commonly known as REITs can be defined as a firm that owns and operates Income producing Commercial Real Estate assets. REITs can operate in commercial entities ranging from office, warehouses, shopping malls, hospitals to hotels; and their structure is similar to that of mutual funds, wherein the earnings are distributed amongst its shareholders. In simple terms REITs are trading units listed and traded on stock exchange.
It must be recalled that in his budget speech last month, the Indian Finance Minister, Arun Jaitley had announced tax benefits for REITs and Infrastructure Investment Trusts commonly known as InvITs. With the Securities and Exchange Board of India (SEBI), approving the setting up of REITs on 10th August 2014, a new source of financing will now be available for cash strapped real estate sector. The regulator also approved InvITs that will enable the property developers to monetize their infrastructure resources through a stock exchange listing.
SEBI said that it will streamline and simplify registration for stock brokers and clearing members by assigning them a unified registration for doing business in all the depositories and stock exchanges in the country. The final notification will be issued in a month or two to make these new regulations effective.
The SEBI in its board meeting in New Delhi said that REITs should have an initial size of at least 250 crore rupees for its shareholders and should function with at least 500 crore rupees asset pool. Speaking on the REITs exposure limit for individual investors, SEBI chairman U K Sinha said, “The idea is that even if somebody can invest as low as 2 lakh rupees, such a person can get the benefit of the income from the completed projects.”
Elaborating further on the tax benefits that were cleared in this Budget for REITs and InvITs, the SEBI chairman added, “On tax pass through, we have realized that when the Special Project Vehicle (SPV) is transferred to the REIT, at that stage there will be a tax deferral. That means at that stage, tax will not have to be paid. When the investor in that original project SPV finally disposes of his property at that stage he will be paying the tax…”
Let’s now have a look at the 10 benefits of SEBI’s final approval for setting up the Real Estate Investment Trusts –
- Provides funding to financially burdened real estate industry through alternate routes
- Mortgage REITs will provide finances to property developers
- SEBI has cut the minimum asset pool of REITs from 1000 crores to 500 crore rupees thereby enabling midsized real estate developers to participate
- Enables individuals with minimum of 2 lakh rupees investment to earn from completed commercial real estate projects
- Equity REITs can generates revenue for investors via rent or lease from tenants
- Ensures transparency as investors know the property’s current value since the investments are not made in under construction properties
- Offers the investors high returns coupled with liquidity
- Tax efficient as REITs will be taxed only once the projects are sold
- Small property developers who don’t have sufficient rent assets to float Rs. 5 billion REIT can combine with multiple sponsors subject to maximum of 3 to launch a joint REIT. Each sponsor should hold minimum 5% of units and overall 25% of units
- SEBI has given its go ahead for Foreign Investments in REITs. This will allow insurance companies and pension funds to invest in real estate, thereby enabling the much needed financial cushion to this sector