Small REITS's & its Huge Economic Impact on Indian Economy

  •   Wed, Jan 17 2024
  •   By CA & CMA K Ranganatha Achar

January 17, 2024

Introduction

I usually like to travel across the length and breadth of our country as a part of work or leisure travel and whenever I move around different parts of our country, my roving eyes go through the various developmental activities across the various cities and always I used to have a question on my mind especially with respect to investments in the real estate sector in Tier 2,Tier 3 and Tier 4 cities because a lot of action is required in such cities where the investments have to necessarily come from the local population or entrepreneurs without any outside support since the promoters of the real estate projects are not exactly known in the bigger cities and amongst the bankers.

Tier 1 cities do not have that much problem as far as the new investments are concerned as they are backed by HNI and the Banks jointly because of their presence in the big cities. So when I was pondering about the said subject as to who will take interest in such minor real estate projects in much smaller cities. SEBI has come up with a separate proposal to handle the requirements of real estate projects in smaller destinations & cities which I personally feel will be a great boon for India as a country as a whole because anything connected with Real estate means direct linkages to Building Materials like steel, cement, sand, blocks, cladding materials, power & water requirements, establishments of shops, Direct & Indirect Underemployment both in Pre and Post formation stages. It’s like a encircling of the growth of an robust economy across the country which hitherto was confined to projects having value more than Rs 500 crores or more as against the proposed SME REIT's of Rs 50 Crores. Count the number of cities in TIER 2, 3 & 4 cities and we have a huge figure sitting across the table which will further catapult India in to further growth because of the huge youthful population who are the main target of consumption and the harbinger of growth. 

So what is a Small & Medium REIT?

Yes, that's a significant development for the Indian Real Estate Investment Trust (REIT) market! The Securities and Exchange Board of India (SEBI) is amending its regulations to facilitate the entry and growth of Small and Medium REITs (SM REITs).

Here are some key takeaways from the news:

  • New regulatory framework: SEBI will create a dedicated regulatory framework for SM REITs, which differ from existing REITs in terms of minimum asset size. Existing REITs require a minimum asset size of Rs. 500 crore, while SM REITs will have a lower threshold or ticket size of Rs. 50 crore.
  • Fractional investment: SEBI aims to bring entities facilitating fractional investment in real estate under the SM REIT framework. This will allow smaller investors to participate in the real estate market more easily.
  • Special purpose vehicles: SM REITs can hold assets through wholly-owned special purpose vehicles (SPVs) constituted as companies. This provides flexibility in structuring transactions and managing risk.
  • Potential benefits: The move is expected to boost liquidity in the Indian real estate market, attract new investors, and provide developers with additional funding opportunities.

SEBI's board, at its recently held meeting had approved amendments to REITs (Real Estate Investment Trusts) Regulations, 2014 in order to create a regulatory framework for the facilitation of SM REITs, with an asset value of at least Rs 50 crore vis-a-vis minimum asset value of Rs 500 crore for existing REITs at present. "SM REITs shall have the ability to create separate scheme (s) for owning real estate assets through SM REITs shall have the ability to create separate scheme (s) for owning real estate assets through (SPV) special purpose vehicle constituted as companies, " The regulatory framework approved by the board for SM REITs provides for the structure, migration of existing structures meeting certain specified criteria, obligations of the investment manager including net worth, experience and minimum unit holding requirement, investment conditions, minimum subscription, distribution norms and valuation of assets. However, it's important to note that the amended regulations are still in the process of being finalized. Public feedback is being invited until January 8, 2024, before the suitable changes come into effect. 

A Real Estate Investment Trust (REIT) is a financial instrument that allows individuals to invest in income-generating real estate properties without having to own directly or manage them. In the Indian context, REITs were introduced to the market in 2014 by the Securities and Exchange Board of India (SEBI) to provide a more accessible and liquid way for investors to participate in the real estate market. REIT stands for "Real Estate Investment Trust". A REIT is organized as a partnership, corporation, trust, or association that invests directly in real estate through the purchase of properties or by buying up mortgages. REITs issue shares that trade stock exchange and are bought and sold like ordinary stocks A REIT is a company that owns, operates, or provides financing for income-generating real estate properties. They currently need to have an asset base of Rs 500 crore. These entities pool funds from investors, directing them toward various commercial real estate ventures such as workspaces and malls. REITs operate similarly to shares, being listed on stock exchanges, enabling investors to buy or sell them at any time on the exchange

Here are some key features and aspects of REITs in the Indian context:

  1. Structure:
  • A REIT is a trust that owns, operates, or finances income-generating real estate across various sectors such as office spaces, shopping malls, hotels, and warehouses.
  • It is structured as a trust and is required to be registered with SEBI. 

     2. Units and Investors:

  • REITs are divided into units, and investors can buy and sell these units on the stock exchange, providing liquidity to real estate investments.
  • Any individual or institutional investor can invest in REITs, subject to the regulations set by SEBI. 

     3. Asset Portfolio:

  • REITs in India typically hold income-generating assets, and they are mandated to distribute at least 90% of their rental income to unit holders through dividends. 

     4. Income Distribution:

  • Investors receive a portion of the income generated by the REIT in the form of dividends, and the frequency of these distributions can vary. 

     5. Regulatory Framework:

  • SEBI regulates and oversees the functioning of REITs in India. There are specific guidelines and regulations that REITs must adhere to, ensuring transparency and investor protection. 

     6. Tax Implications:

  • Dividends received by investors from REITs are generally tax-efficient. However, the tax implications may vary, and investors should consult with tax professionals to understand the specific details. 

     7. Minimum Investment:

  • There is generally A minimum investment requirement any where between Rs 10k to 15 K per unit for retail investors, making REITs accessible to a broader range of individuals that too in DEMAT format. In the formative years investment was at a higher figure which the common man couldnt participate effectively and so SEBI has brought about a change in the rule. 

      8. Risks and Returns:

  • Like any investment, REITs carry risks, and their performance is linked to the real estate market. Factors such as economic conditions, demand for commercial spaces, and interest rates can impact the returns of REITs.

Investors considering REITs should conduct thorough research, understand the specific details of the REIT they are interested in, and assess their risk tolerance before investing. It's also advisable to seek advice from financial professionals for personalized guidance based on individual financial goals and circumstances. 

Let me conclude with the traded REIT's of India with their latest trading prices at the stock markets so that we can have an idea at the performance in the stock markets. So REITS are here to stay in the Indian market and may play a long role in the growth story of our nation called INDIA. 

 

 

 
By CA & CMA K Ranganatha Achar
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