A Quick Primer on REITs and InvITs in India
Sanket Dantara
Ideate, Create and Scale | Go To Market | Partnerships | Products | Strategy | Business Development | Customer Success | M&A | FP&A | Transformation
With the recent interest shown for the IRB InvIT and the ongoing Sterlite Power InvIT, the notification and setting up of RERA, the Indian real estate and infrastructure sectors are at the cusp of being transformed into more transparent, liquid and better governed sectors.
While REITs are not new and have been existing in more developed markets since a while (REITs were first seen in the US as far back as the 1960s), it is only now that we see the Indian markets catching up
In layman terms, a REIT or InvIT is like a mutual fund where the units provide ownership in either Real Estate or other assets as held by the trust.
While there may be minor nuances and tax implications, the basic structure is similar across the world.
The key elements are as follows
1. Sponsor : This is the person who sets up the REIT or InvIT. Regulations will decide the maximum number of sponsors, minimum % of holding of the units, their eligibility (like net worth, track record etc.), lock in period etc.
2. Manager : Manages the investment, appoints service providers, addresses grievances of unit holders, ensures audits and assists with regulatory submissions. Again regulations will decide eligibility criteria in terms of net worth, experience in the field etc.
3. Trustee : Is the trustee for the trust (in which investors hold units). They are required to be registered with SEBI. They are responsible for appointing the investment manager, and compliance and hence to avoid conflict of interest should be unrelated to the sponsor and manager.
4. Investment Conditions : This determines what kinds of assets can the trust hold. In India REITs and InvITs are mandatorily required to hold 80% of the value in completed and revenue generating projects (or rent generating real estate).
This implies that a bulk of the upfront cost should already have been incurred and borne by the project owner before a REIT or InvIT can invest. So while this protects the unit holders interest and enables the trust to pay out dividends sooner, it will ideally not be useful as a funding route for fresh funding. It will though enable holders of completed projects to securitize and sell their holdings. For Real Estate the implications is that the flows would be skewed towards Commercial real estate, which is where bulk of the leasing happens unless we see “build to rent” kinds of residential townships coming up. Given the governments push for affordable housing and housing for all, it might not be a bad idea.
There may be additional conditions on the minimum number of projects, investment caps on each investment, ability to invest in other REITs or InvITs (currently not permitted in India), direct holding vs. SPV etc
5. Dividend distribution policy : 90% of net distributable cash flow has to be paid as dividend. A dividend has to be paid at least once in 6 months (for listed) and 1 year (for private) and 90% of cash flows from sales unless reinvested should be paid out.
6. Leverage : Conditions around how much leverage can be taken (up to 49% of the assets) and requirements around it (if higher than 25%, credit rating and unit holders approval)
7. And then there would be other items like listing requirements, permissions and criteria around related party transactions, how often does the portfolio have to be valued, governance requirements etc.
8. And lastly there would be the tax implications for each of the sponsor, the REIT or InvIT, the SPV and the unit holders
Below is an excellent representation of the India REIT structure
There you go. For additional details you may refer to the following resources
Other useful resources
https://www.pwc.com/sg/en/publications/assets/aprea-in-realestate-infra-trusts.pdf
https://naredco.in/notification/pdfs/analysis-of-reit-regulations-2712.pdf