Friday, January 18, 2008


Sebi issues draft guidelines on real estate investment trusts

Invest in real estate, they say. It costs only Rs x a square foot, they add. But you cannot buy a couple of square feet of land even as an investment. And that’s why the idea of a real estate investment trust or REIT is so attractive. After a long wait, the securities and exchange board of India (Sebi) has drafted guidelines on Real Estate Investment Trusts (REIT) to be launched in India. It is expected to issue the final guidelines later this year.

How will it work?
A REIT will be structured in a similar way as a mutual fund in India is structured. The sponsor company will need to set up a real estate investment management company that will manage the funds on a day-to-day basis. This investment management company will need to report to a real estate investment trust, in whose hands your money will be entrusted in. The investment management company and trust will then launch real estate schemes that will solicit monies to be invested in real estate. They will need to be only closed-end and will be listed on the stock exchanges within six months after they are launched.

A REIT will then invest this money it collects, in various real estate projects. REITs will not be allowed to invest in equity and debt securities of real-estate companies; they must invest only in real estate directly. REITs will not be allowed to invest in vacant plots, they would need to invest in developed properties that it will then rent out. The rental income it so earns on them will be your – the unitholder’s – returns.

Note, that REITs are income-generating instruments as they will have to distribute at least 90 per cent of all the gains, as dividends, that they make, in a year. A REIT, under all its schemes would not be allowed more than 15 per cent in a single real estate project and more than 25 per cent in real estate projects developed and marketed by a single group of companies.

REITs will have to appoint an independent property valuer to value the underlying real estate. The principal valuer will need to value all the underlying real estate once a year or when a new scheme is launched. Based on the Valuer’s reports, a REIT scheme will disclose its net asset value (NAV). The draft guidelines are not clear as to the frequency of NAV disclosures – remember real-estate experts had objected to a daily NAV declaration when Sebi had proposed it initially saying valuing real estate on a daily basis is neither feasible nor makes sense as prices do not show noticeable changes every day – but the guidelines indicate that the NAV will need to be declared once a year on an average. What may also happen, once the final guidelines are issued, is that all underlying real estate would have to be valued once a year, but the NAV will need to updated or declared every time when any of its underlying real estate is valued.

Assume that a REIT scheme buys four properties in a given year, say, at the end of four quarters i.e. March, July, September and December. If all these properties need to be valued after each of then completes a year, a REIT will declare NAV four times in a year, once every time its underlying property is valued.

How much returns?
The draft guidelines are silent on a REIT’s cost structure, taxation incidences. Although it’s too early to make predictions, real estate players expect a return of around 10-15 per cent returns per annum. “Typically, this will be rental income. But once in three to five years, a REIT could also sell a property and distribute the proceeds to unitholders. This is when unitholders will make a capital gain”, adds Ambar Maheshwari, director-investment advisory, DTZ – a real estate advisor.

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