India markets regulator looks to revive REITs, issues draft guidelines

India markets regulator looks to revive REITs, issues draft guidelines

Thu, Oct 10 2013

(Adds details on proposed rules)

MUMBAI, Oct 10 (Reuters) – India’s capital markets regulator on Thursday issued draft guidelines to set up real estate investment trusts (REITs) in the country, reviving an effort it had put on hold in 2008 during the global financial crisis. REITs are tax-efficient listed entities that mainly invest in income-producing real estate assets from which most of the earnings are distributed to their shareholders.India’s draft regulation for REITs comes at a time when its debt-laden developers are struggling to raise money for future growth and development in an economy which is growing at its slowest pace in a decade.

REITs would allow property developers to monetise their developed, revenue-generating assets by off-loading them in a separate listed entity.

The draft rules propose that only companies with assets worth at least 10 billion rupees ($161.52 million) could list as a REIT, provided they sell at least 2.5 billion rupees worth of stock in the initial public offering.

The Securities and Exchange Board of India (SEBI) has proposed limiting investment in REITs initially to institutional investors and high net worth individuals – a departure from most global REIT structures – aimed at protecting small investors in an as-yet untested investment product. ($1 = 61.9100 Indian rupees)

 

India Regulator Issues Draft Rules on REITs

KENAN MACHADO

Oct. 10, 2013 2:10 p.m. ET

MUMBAI—India’s market regulator Thursday issued a draft of guidelines on the setting up of real-estate investment trusts, or REITs, a move that could help attract investments in a sector that is facing a drought of funds in a slowing economy.

According to lawyers and consultants, allowing REITs would also help attract foreign money and provide liquidity to existing investors. With rules in place, the real-estate sector would see investments from more local retail investors as well, they say.

The real-estate sector is one of the hardest hit by India’s economic slowdown. The slow growth and high interest rates have made many potential buyers postpone purchase of apartments and commercial property or scrap their plans. Many developers also have large debt, which they took to launch projects when demand was strong in a booming economy just a few years ago.

REITs own properties and their revenue comes principally from rent. Most of the revenue is distributed to shareholders and REITs usually get special tax considerations, which make them attractive to investors.

According to the draft guidelines posted on the website of the Securities and Exchange Board of India, companies with more than 10 billion rupees ($163 million) of assets can list as REITs. They must make an initial public offering of at least 2.5 billion rupees and a quarter of their stake must be with public holders, says the draft.

The requirement of minimum assets is proposed to ensure that only established firms form REITs, the regulator said. Also, according to the draft, each investor must buy at least 200,000 rupees of units.

Under the proposals, 90% of a REIT’s assets should be in completed, revenue-generating properties and 90% of its net income distributed to investors.

“Now there is a market to sell,” said Ruchir Sinha , who heads the debt and private-equity in real-estate practice at law firm Nishith Desai Associates. With REITs, investors will have access to a regulated asset with assured revenue, he added.

Myriad regulations and high taxes have made it difficult for investors, particularly private-equity firms, to exit real-estate investments in India’s down market. With the REIT structure allowing the participation of retail investors, demand for such sakes may now pick up.

Once REITs are allowed, it will provide an additional exit route for existing investors, said Anshuman Magazine, chairman of real-estate manager and broker CBRE South Asia Pvt. Ltd. Until now, exits were only between two parties and limited to individual projects, he said.

“It will also benefit real-estate developers who will be able to transfer their developed assets into a REIT,” said Bhairav Dalal , associate director at consultant PricewaterhouseCoopers.

“The government will need to take a call on taxing REITs,” said Mr. Sinha of Nishith Desai Associates.

The draft didn’t make any suggestions on tax.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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