Real estate is one of the most attractive and profitable sectors in India, but it also comes with some challenges such as high capital requirement, low liquidity, legal issues, and maintenance costs. If you want to invest in real estate without owning and managing physical properties, you may consider investing in REITs or Real Estate Investment Trusts.

 

Functioning of REITs : REITs are companies that own, operate, or finance income-generating real estate assets such as office spaces, malls, hotels, warehouses, etc. REITs offer investors a way to participate in the real estate market by buying units or shares of the REIT, similar to buying shares of a company. REITs distribute most of their income to the unit holders or shareholders as dividends, and also offer capital appreciation potential.

 

But how do REITs function in the Indian context? What are the rules and regulations governing the REITs? How are the REITs structured and managed? How are the REITs valued and taxed? In this article, we will answer these questions and provide a comprehensive guide on the functioning of REITs in the Indian context.

 

Functioning of REITs : What are the rules and regulations governing the REITs in India?

 

REITs in India are regulated by the Securities and Exchange Board of India (SEBI), which is the market regulator for the REITs. SEBI has issued the SEBI (Real Estate Investment Trusts) Regulations, 2014, which lay down the framework for the registration, listing, investment, valuation, distribution, and disclosure norms for the REITs. SEBI also monitors and supervises the functioning of the REITs and ensures that they comply with the rules and regulations.

 

Functioning of REITs : Some of the key provisions of the SEBI (REITs) Regulations are:

 

• A REIT must have a minimum net worth of Rs. 500 crore, and a minimum of 200 unit holders, each holding units worth not more than 25% of the total value of the REIT.
• A REIT must raise funds through an initial public offering (IPO) or a follow-on public offer (FPO) of its units, and list its units on a recognized stock exchange. The minimum subscription amount for the IPO or FPO must be Rs. 50,000, and the minimum trading lot must be Rs. 1 lakh.
• A REIT must invest at least 80% of its assets in completed and income-generating real estate assets, and up to 20% in under-construction or non-income-generating assets, securities of other REITs, mortgage-backed securities, equity shares of companies deriving at least 75% of their income from real estate, etc. A REIT must also invest in at least two projects, with not more than 60% of its assets in one project.
• A REIT must appoint at least two independent valuers to value its assets at least once a year, and disclose the net asset value (NAV) of the REIT at least twice a year. The valuation of the assets must be done as per the International Valuation Standards or any other standards as specified by SEBI.
• A REIT must distribute at least 90% of its net distributable cash flow to the unit holders or shareholders as dividends, at least twice a year. The dividends are tax-free in the hands of the investors, but the REIT must pay a dividend distribution tax (DDT) of 15% on the dividends.

 

Functioning of REITs : How are the REITs structured and managed in India?

 

A REIT in India must have a two-tier structure, consisting of the REIT at the top level, and the special purpose vehicles (SPVs) at the lower level. The REIT must hold at least 51% of the equity share capital or interest in the SPVs, which in turn must hold the real estate assets. The REIT may also invest directly in real estate assets, subject to certain conditions.

 

The REIT is managed by a board of directors, who are appointed by the sponsor of the REIT. The sponsor is the person who forms the REIT and transfers the property owned by them to the trust. The sponsor must have a minimum net worth of Rs. 100 crore, and a minimum of 5 years of experience in the real estate industry. The sponsor must also hold at least 25% of the REIT units for at least 3 years after listing, and at least 15% thereafter.

 

The REIT also appoints a trustee, who is an independent entity that holds the assets on behalf of the unit holders or shareholders. The trustee ensures that the REIT complies with the rules and regulations of SEBI, and protects the interests of the investors. The trustee also appoints a manager, who is responsible for making investment decisions and managing the REIT assets. The manager is typically a private company closely held by the sponsor.

 

The REIT also appoints an independent valuer, who values the REIT assets at least once a year, and discloses the net asset value (NAV) of the REIT at least twice a year. The valuation of the assets must be done as per the International Valuation Standards or any other standards as specified by SEBI. Additionally, the REIT may appoint auditors, registrar and transfer agents, merchant bankers, and custodians, to carry out activities incidental to the operation of the REIT and meet the requirements of law.

 

Functioning of REITs : How are the REITs valued and taxed in India?

 

The valuation of the REITs in India is done by the independent valuers, who value the REIT assets at least once a year, and disclose the net asset value (NAV) of the REIT at least twice a year. The valuation of the assets must be done as per the International Valuation Standards or any other standards as specified by SEBI. The NAV of the REIT reflects the fair value of the underlying properties, and is used to determine the unit price or share price of the REIT on the stock exchange.

 

The taxation of the REITs in India is done at three levels: the REIT level, the SPV level, and the unit holder or shareholder level. The taxation of the REITs is as follows:

 

• At the REIT level, the REIT is exempt from paying any income tax on the income received from the SPVs or from the direct investment in real estate assets, provided that it distributes at least 90% of its net distributable cash flow to the unit holders or shareholders as dividends. However, the REIT must pay a dividend distribution tax (DDT) of 15% on the dividends paid to the investors.
• At the SPV level, the SPV is exempt from paying any income tax on the income distributed to the REIT, provided that the REIT holds at least 51% of the equity share capital or interest in the SPV. However, the SPV must pay a minimum alternate tax (MAT) of 18.5% on its book profits, if any.
• At the unit holder or shareholder level, the unit holder or shareholder is exempt from paying any income tax on the dividends received from the REIT, as the dividends are already taxed at the REIT level. However, the unit holder or shareholder must pay a capital gains tax on the sale of the REIT units or shares, depending on the holding period and the mode of sale. The capital gains tax rates are as follows:
  • For units or shares held for more than 36 months, the long-term capital gains tax rate is 10% (without indexation) or 20% (with indexation), plus applicable surcharge and cess, if the sale is done through the stock exchange and the securities transaction tax (STT) is paid. If the sale is done off the stock exchange or the STT is not paid, the long-term capital gains tax rate is 20% (with indexation), plus applicable surcharge and cess.
  • For units or shares held for less than 36 months, the short-term capital gains tax rate is 15%, plus applicable surcharge and cess, if the sale is done through the stock exchange and the STT is paid. If the sale is done off the stock exchange or the STT is not paid, the short-term capital gains tax rate is the normal income tax rate applicable to the unit holder or shareholder, plus applicable surcharge and cess.

 

Conclusion Functioning of REITs

 

Functioning of REITs :REITs are a unique and attractive way to invest in the real estate sector in India, without having to buy and manage physical properties. REITs have a special structure, listing, investment, valuation, and distribution mechanism, which provide income, growth, diversification, liquidity, and transparency benefits for the investors. However, REITs also have some risks and challenges, such as market, regulatory, operational, and liquidity risks, which the investors should be aware of and evaluate before investing in REITs. By following this guide on the functioning of REITs in the Indian context, you can gain a better understanding of this investment option and decide if it suits your goals and preferences.

 

Sources: Functioning of REITs

 

• Overview of REITs in Indian Context Article – Vinod Kothari
• What Is A REIT And How Does It Work? – Forbes Advisor INDIA
• What You Didn’t Know About Indian REITs | Value Research
• Are REITs (Real Estate Investment Trusts) the Future of Indian …
• An overview of Real Estate Investment Trusts in India

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