REIT – A win-win for investors and developers
Real Estate Investment Trust (REIT) is a concept modeled on the lines of Mutual Funds. It is a progressive instrument to mobilize savings of people and invest the same into development of Real Estate.
REIT offers unique opportunity to retail investors to earn higher rate of returns accruing from real estate investments by investing their small savings, which otherwise require huge capital. The recent study by ANAROCK suggest that investors can earn as high as 14% per annum on their investment in REIT.
Most importantly, it provides new avenue to builders/developers to funds their ambitious projects. Thus, real estate developers can effectively use REIT to raise finance from the market and bring much-needed liquidity in their operations.
As per SEBI regulations, there are certain eligibility criteria to be fulfilled, to float a Real Estate Investment Trust. This article discusses those conditions, especially from perspective of builder/developer.
Structure – Stakeholders involved
Before, looking at eligibility conditions, let us understand what role a real estate developer would play in launching a REIT. For this, it is imperative to get acquainted with stakeholders involved in formation of a REIT. These include a Trustee, Sponsor/Sponsor Group, Manager and a Special Purpose Vehicle.
- Sponsor/Sponsor Group are the initial investors who set up the REIT in motion by appointing the trustee of the REIT.
- The Trustee holds the REIT assets for the benefit of the unit holders in accordance with the trust deed and SEBI regulations.
- The trust will appoint Manager who is responsible to make the investment decisions with respect to the underlying assets of the REIT.
- SPV or a Special Purpose Vehicle is an entity or a company through which investments will be made into the real estate assets.
Therefore, a builder/developer desirous of raising funds through REIT will generally play role of Sponsor(s) or Sponsor Group(s).
Eligibility for Sponsor(s) or Sponsor Group(s)
1. Networth: The sponsor(s), on a collective basis, should have a net worth of atleast one hundred crore rupees. Further, each sponsor should have a net worth of atleast twenty crore rupees.
2. Experience: The sponsor or its associate(s) should have not less than five years experience in development of real estate or fund management in the real estate industry. Moreover, where the sponsor is a developer, at least two projects of the sponsor should have been completed.
3. Holding in REIT: Each sponsor shall hold or propose to hold not less than 5% of the number of units of the REIT on post-initial offer basis
4. Identification: Each sponsor and sponsor group shall be clearly identified in the application of registration. Each sponsor group should be represented by atleast one person.
Further, out of the entities categorized as sponsor group, only the following entities may be considered:
(a) a person or entity who is directly or indirectly holding an interest or shareholding in any of the assets or SPVs or holding company proposed to be transferred to the REIT.
b) a person or entity who is directly or indirectly holding units of the REIT on post-issue basis.
c) a person or entity whose experience is being utilized by the sponsor for meeting with the eligibility conditions mentioned in (2) above.
Conclusion
The REIT is a well-tested and successful mode of raising funds in the advanced countries like USA. REITs of all types collectively own more than $3 trillion in gross assets across the USA.
The Indian middle-class represents huge untapped source of funds for the companies developing real estate assets. With bank loans and other sources of funds drying up, these companies should take steps to consider alternate sources of funds. The first step would be to assess whether they fit into eligibility criteria to act as a “Sponsor” of REIT.
Our team can assist your company to float a REIT, right from eligibility assessment, complying of eligibility criteria to listing of REITs.
You can get in touch with us at +91 8080117040 or write at info@bhaskara.in.
Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.