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Understanding of REIT Structure and Impact on Real Estate Industry 
Manan Choksi 
Regional Director 
RE/MAX Gujarat
Agenda: 
• Background 
• Structures of REITs 
• Salient Features of SEBI Regulations 
• Regulatory Framework 
• Taxation 
• REIT 
• Sponsors 
• Unit Holders 
• Responsibilities of various parties to the REIT 
• How this will help real estate industry? 
• Benefits for small real estate players 
RE/MAX Gujarat
Background
WHY REIT?
Background 
Evolution of REITs 
Global evolution of REITs 
1970s 
•Australia (1970) 
RE/MAX Gujarat 
Source: European Public Real Estate Association (EPRA) - Global REIT Survey 2013 
REITs started in the US in 1960. Over the past 50 years, the US REITs has 
attracted a market capitalisation of over USD600 billion and has been 
adopted in several parts of the world. As of 30 June 2014, there were 456 
stock exchange-listed in the FTSE EPRA/NAREIT Global Real Estate Index in 
47 countries around the globe. Of the USD1.2 trillion in equity market 
capitalisation represented in the Developed Markets index, 78 percent 
came from REITs. 
1960s 
•United 
States(1960) 
1990s 
•Canada 
(1994) 
•Brazil (1995) 
2000s 
•Japan (2000) 
•Singapore (2002) 
•France (2003) 
•Hong Kong (2003) 
•Malaysia (2006) 
•UK (2007) 
2010s 
•Mexico (2011) 
•Pakistan 
(2013) 
•South Africa 
(2013) 
Legislative 
framework in place 
•China 
•India 
•Spain
Evolution of REITs in India 
In 2007 SEBI formally introduced the draft REITs regulations for public comments. 
Because of downturn in the market during that period, no further development took place in the 
REITs regulation, until October 2013 when 
a second draft of the regulations was issued for public comments by SEBI. After taking industry 
amendments to regulations were made and the draft was approved allowing setting up and listing 
of REITs. Post the clarifications provided in the 2014 budget, a final draft was introduced by SEBI in 
August 2014. 
S.NO Country No. of 
RE/MAX Gujarat 
REITs 
Market Size 
(USD billion) 
inputs, 
Percentage of 
global REITs 
Market 
REITs performance as per S&P Dow Jones (Annual 
return in 
Percent) 
5years 10 
years 
1 United States of 
America 
163 621 57.68 23.80 9.58 
2 Australia 52 86 8.33 18.11 5.10 
3 France 37 68 6.33 20.74 16.46 
4 Japan 41 64 5.98 14.84 7.78 
5 United Kingdom 23 49 4.55 18.52 N.A. 
6 Singapore 32 45 4.23 22.04 15.09
REITs advantages to different stakeholders 
1. Improves liquidity in the sector 1. Help improve government's revenue 
2. Capital raising REITs opportunity advantages for to mid-different tier stakeholders 
2. Funding through REITs could help 
developers especially for small facilitate other key real estate policy 
companies with lower/minimal credit implementation like targeting 100 smart 
worthiness 1. Improves liquidity in the sector 
cities 
1. Help improve government's revenue 
2. Capital raising opportunity for mid-tier 
2. Funding through REITs could help 
developers especially for small 
facilitate other key real estate policy 
companies with lower/minimal credit 
implementation like targeting 100 smart 
worthiness cities 
Developers Government 
REITs' 
advantages 
Institutional 
investors 
Retail 
investors 
1. Provides an exit opportunity for existing 
PE players, developers and financial 
2. Act as an alternative financing 
opportunity with increase depth of Indian 
real estate capital markets 
3. Help attract long term investors such as 
pension and insurance funds looking for 
moderate risk v/s return ratio 
1. Reduces ticket size for investing in real 
estate sector 
2. Transparent investment alternative in real 
estate sector with experienced 
professional and independent oversight 
3. Easy entry and exit in the real estate 
sector 
Developers 
Government 
REITs’ 
advantages 
Institutional 
investors 
Retail 
investors 
1. Reduces ticket size for investing in real 
estate sector 
2. Transparent investment alternative in real 
estate sector with experienced 
professional and independent oversight 
3. Easy entry and exit in the real estate 
sector 
1. Provides an exit opportunity for existing 
PE players, developers and financial 
investors 
2. Act as an alternative financing 
opportunity with increase depth of Indian 
real estate capital markets 
3. Help attract long term investors such as 
pension and insurance funds looking for 
moderate risk v/s return ratio
Background 
Exchange Board of India 
(Real Estate Investment 
Trusts) Regulations, 2008 
Satwalekar 
Committee 
RE/MAX Gujarat 
9 
1996 
Draft Securities & 
1999 
2002 
2008 
2008 
2013 2014 
SEBI (Mutual Funds) 
Regulations, 1996, 
Chapter VIA 
Sub-Committee 
set up by AMFI 
SEBI Notification of real 
estate mutual fund 
schemes [REMFs] 
Draft Securities & 
Exchange Board of India 
(Real Estate Investment 
Trusts) Regulations, 2013 
Securities & Exchange 
Board of India (Real Estate 
Investment Trusts) 
Regulations, 2014 
And Finance Act 2014
Structures of REIT
REIT 
Institutional 
Funds / HNI 
Sponsors Investors 
Unit Holders 
Properties 
Management Services 
REIT 
Management 
Company 
Management Fees 
Property 
Management 
Company 
Trustee 
Maximum 75% Minimum 25% 
Investments in REIT Units 
Acts on behalf of Unit Holders 
Trustee Fees 
Services 
Fees 
REIT Mechanism
REIT Structure with Borrowing 
Assets 
Liabilities 
Capital 
Invested Assets 
(Real Estate, etc.) 
Tenant 
Financial 
Institution 
(Lender) 
Unit holders 
Broker 
Stock Exchange 
Unit holders 
Real Estate Investment 
Advisor [Asset Manager] 
Investment 
Rent 
Lease 
Contract 
Borrowing 
Interest 
Repayment 
Investment 
Dividend 
Execution 
Asset 
Management
REIT Structure with SPV 
Unit Holders 
REIT 
Indian Asset 
Company [SPV] 
Indian Real 
Estate Assets 
Trust 
Management Co. 
(the manager) 
Indian 
Promoters 
Trust Services 
Co. (the trustee) 
Services Company 
(Property 
Manager) 
Management 
Services Co. 
Acts on behalf of 
unit holders 
(Individual Property 
Manager) 
Ownership of Units Distributions 
Management Fees 
Management 
Services 
Trustee ‘s Fees 
Ownership > 50% 
Dividends and/or interest 
Nominates Individual 
Property Manager 
Ownership 
Rental Income
Salient Features of SEBI Regulations
Salient Features 
 In order to encourage set of REITs in India, SEBI has issued SEBI 
(Real Estate Investment Trusts) Regulations, 2014. Pursuant to the 
regulations, the following are the salient features of REIT: 
 REITs shall be set up as a trust and registered with SEBI. It shall 
have parties such as Trustee, Sponsor(s) and Manager. 
 The trustee of a REIT shall be a SEBI registered debenture trustee 
who is not an associate of the Sponsor/manager. 
 REIT shall invest in commercial real estate assets, either directly 
or through SPVs. In such SPVs, REIT shall hold or proposes to hold 
controlling interest and not less than 50% of the equity share 
capital or interest. Further, such SPVs shall hold not less than 80% 
of its assets directly in properties and shall not invest in other 
SPVs. 
RE/MAX Gujarat 
15
Salient Features 
 Once registered, the REIT shall raise funds through an initial offer. 
 Subsequent raising of funds may be through follow-on offer, rights 
issue, qualified institutional placement, etc. 
 The minimum subscription size for units of REIT shall be Rs 2 lakhs. 
 The units offered to the public in initial offer shall not be less than 25% 
of the number of units of the REIT on post-issue basis. 
 Units of REITs shall be mandatorily listed on a recognized Stock 
Exchange and REIT shall make continuous disclosures in terms of the 
listing agreement. Trading lot for such units shall be Rs 1 Lakh. 
RE/MAX Gujarat 
16
Salient Features 
 For coming out with an initial offer, the value of the assets 
owned/proposed to be owned by REIT shall be of value not less than Rs 500 
crore. Further, minimum issue size for initial offer shall be Rs 125 crore. 
 A REIT may have multiple sponsors, not more than 3, subject to each 
holding at least 5% of the units of the REIT. Such sponsors shall collectively 
hold not less than 25% of the units of the REIT for a period of not less than 
3 years from the date of listing. After 3 years, the sponsors, collectively, 
shall hold minimum 15% of the units of REIT, throughout the life of the 
REIT. 
RE/MAX Gujarat 
17
Salient Features 
 Not less than 80% of the value of the REIT assets shall be in completed and 
revenue generating properties. 
 Not more than 20% of the value of REIT assets shall be invested in 
following: 
i. developmental properties, 
ii. mortgage backed securities, 
iii. listed/ unlisted debt of companies/body corporates in real estate sector, 
iv. equity shares of companies listed on a recognized stock exchange in 
India which derive not less than 75% of their operating income from 
Real Estate activity, 
v. government securities, 
vi. money market instruments or Cash equivalents. 
 However investments in developmental properties shall be restricted to 
10% of the value of the REIT assets. 
 A REIT shall invest in at least 2 projects with not more than 60% of value 
of assets invested in one project. Detailed investment conditions are 
provided in the Regulations. 
RE/MAX Gujarat 
18
Salient Features 
 REIT shall distribute not less than 90% of the net distributable cash 
flows, subject to applicable laws, to its investors, at least on a half 
yearly basis. 
 REIT, through a valuer, shall undertake full valuation on a yearly basis 
and updation of the same on a half yearly basis and declare NAV within 
15 days from the date of such valuation/updation. 
 The borrowings and deferred payments of the REIT at a consolidated 
level shall not exceed 49% of the value of the REIT assets. In case such 
borrowings/ deferred payments exceed 25%, approval from unit 
holders and credit rating shall be required. 
 Detailed provisions for related party transactions. valuation of assets, 
disclosure requirements, rights of unit holders, etc. are provided in the 
Regulations. However, for any issue requiring unit holders’ approval, 
voting by a person who is a related party in such transaction as well as 
its associates shall not be considered. 
RE/MAX Gujarat 
19
Regulatory framework
Regulatory framework 
Salient features of the Regulatory Framework are as under: 
Structure of the REIT 
 The REIT shall be set up as a Trust under the provisions of the 
Indian Trusts Act, 1882. REITs shall not launch any schemes. 
 The REIT shall have parties such as trustee (registered with SEBI), 
sponsor, manager and principal valuer. 
Registration of REIT 
 The Trust shall initially apply for registration with SEBI as a REIT in 
the specified format. It shall fulfill eligibility criteria as specified in 
the draft Regulations. 
 SEBI, on being satisfied that the eligibility conditions are satisfied, 
shall grant the REIT certificate of registration. 
RE/MAX Gujarat 
21
Regulatory Framework 
Offer of units to the public and listing of units 
 After registration, the REIT shall raise funds initially through an 
initial offer and once listed, may subsequently raise funds through 
follow-on offers. 
 Listing of units shall be mandatory for all REITs. The units of the 
REIT shall continue to be listed on the exchange unless delisted 
under the Regulations. Provisions for delisting have also been 
specified in the Regulations. 
 For coming out with initial offer, it has been specified that the size 
of the assets under the REIT shall not be less than Rs. 500 crore 
which is expected to ensure that initially only large assets and 
established players enter the market. 
 Further, minimum initial offer size of Rs. 125 crore and minimum 
public float of 25% is specified to ensure adequate public 
participation and float in the units. 
RE/MAX Gujarat 
22
Offer of units to the public and listing of units [contd.] 
 General procedure for initial/follow-on offer, filing of offer 
document/follow-on offer document, allotment and listing of units 
has been specified in the Regulations. Detailed disclosures required 
in the offer document/follow-on offer document have also been 
specified in the Regulations. 
 The REIT may raise funds from any investors, resident or foreign. 
However, initially, till the market develops, it is proposed that the 
units of the REITs may be offered only to HNIs/institutions and 
therefore, it is proposed that the minimum subscription size shall 
be Rs. 2 lakhs and the unit size shall be Rs. 1 lakh. 
RE/MAX Gujarat 
23 
Regulatory Framework
Regulatory Framework 
Investment Conditions and Dividend Policy 
 In line with the nature of the REIT to invest primarily in completed revenue generating 
properties, it has been mandated that at least 90% of the value of the REIT assets shall be in 
completed revenue generating properties. In order to provide flexibility, it has been allowed 
to invest the remaining 10% in other assets as specified in the proposed Regulations. 
 To ensure regular income to the investors, it has been mandated to distribute at least 90% of 
the net distributable income after tax of the REIT to the investors. 
 REITs have been allowed to invest in the properties directly or through special purpose 
vehicles, wherein such special purpose vehicles (SPV) hold not less than 90% of their assets 
directly in such properties. However, in such cases, it has been mandated that REIT shall 
have control over the SPV so that the interest of the investors of the REIT are not 
jeopardized. 
 The REIT shall not invest in vacant land or agricultural land or mortgages other than 
mortgage backed securities. Further, the REIT shall only invest in assets based in India. 
 Investment upto100% of the corpus of the REIT has been permitted in one project subject to 
the condition that minimum size of such asset is not less than Rs. 1000 crores. 
 Other detailed investment conditions are provided in the proposed Regulations. 
RE/MAX Gujarat 
24
Regulatory Framework 
Related Party Transactions [RPT]: 
 All related party transactions shall be on an arms-length basis, in the best interest 
of the investors, consistent with the strategy & investment objectives of the REIT 
and shall be disclosed to the exchanges and investors periodically in accordance 
with the listing agreement and the proposed Regulations. 
 Stringent conditions have been imposed on related party transactions including 
detailed disclosures, valuation requirements, approval from majority of investors, 
related party abstaining from voting, restrictions on leasing of assets to related 
parties, requirement of fairness opinion for lease, etc. 
 For any related party transactions for acquisitions/sale of properties, valuation 
reports from 2 independent valuers shall be obtained and the transaction for 
purchase/sale of such properties shall be at a price not greater / less than average 
of the two independent valuations. 
 Investors' approval is required for all the related party transactions wherein the 
value is above a threshold as provided in the proposed regulations. 
RE/MAX Gujarat 
25
Borrowings and deferred payments 
 To avoid excessive leverage, the aggregate consolidated borrowings and deferred 
payments of the REIT have been capped at 50% of the value of the REIT assets. If 
the same exceeds 25%, requirement of credit rating from a credit rating agency 
and approval of majority of investors has been specified. 
Valuation of assets 
 To ensure that the underlying assets of REIT are valued accurately, requirement of 
a full valuation including a physical inspection of the properties has been specified 
at least once a year. Further, a six monthly updation in the valuation capturing key 
changes in the last six months has also been specified. Consequently, the NAV 
shall be declared at least twice in a year. Provisions have also been specified for 
valuation in case of any material development. 
 Detailed disclosures have been specified for the annual and half-yearly valuation 
reports. 
 Further, for any purchase of a new property or sale of an existing property, it has 
been required that a full valuation be undertaken and the value of the transaction 
shall be not less than 90%/ not more than 110% of the assessed value of the 
property for sale/purchase of assets respectively. 
RE/MAX Gujarat 
26 
Regulatory Framework
Rights of investors 
 In order to ensure safeguarding of interests of the investors, several rights have 
been provided to the investors in order to empower them. 
 The investors shall have right to remove the manager, auditor, principal valuer, 
seek delisting of units, apply to SEBI for change in trustee, etc. 
 Further, an annual meeting of all investors is mandatory to be convened by the 
Trustee wherein matters such as latest annual accounts, valuation reports, 
performance of the REIT, approval of auditors & their fees, appointment of 
principal valuer, etc. shall be discussed. 
 Further, approval of investors has been made mandatory in special cases such as 
certain related party transactions, any transaction with value exceeding 15% of 
the REIT assets, borrowing exceeding 25%, change in manager/ sponsor, change in 
investment strategy, delisting of units, etc. 
 In order to ensure that a related party does not influence the decision, it has been 
specified that any person who is a party to any transaction as well as associates of 
such person(s) shall not participate in voting on the specific issue. 
RE/MAX Gujarat 
27 
Regulatory Framework
Taxation of REIT
Taxation of REIT 
RE/MAX Gujarat 
29 
Business Trust 
[REITs] 
Interest 
From SPV 
Exempt u/s 
10(23FC) 
SPV not required to 
deduct TDS 
Distributed to 
profit holders 
TDS deductible 
by Trust 
For Resident – 10% 
For Non-Resident – 5% 
Dividend from 
SPV 
Exempt in the 
hands of Trust 
SPV will not 
pay 
Distributed to 
Unit Holders 
No requirement 
of DDT 
Capital Gains 
Sale of shares 
of SPV/Real 
Estate Assets 
Taxable as LTCG/STCG 
in the hands of Trust 
Distributed to Unit Holders 
Other Income of 
Trust 
Taxable in the 
hands of Trust 
At maximum 
marginal rate 
[30%] 
Distributed to Unit Holders
Taxation of REIT 
 Taxation of Interest Income of REIT: 
 The income by way of interest received by REIT is given 
pass through treatment i.e., there is no taxation of such 
interest income in the hands of the trust. 
 Attention is invited to section 10 (23FC) of the Income Tax 
Act which provides that any income of REIT by way of 
interest is exempt from tax. 
 However, pursuant to section 194LBA, withholding tax at 
the rate of 5 per cent is applicable in case of payment of 
interest component of income distributed to non-resident 
unit holders and 10 per cent is applicable in respect of 
payment of interest component of distributed income to a 
resident unit holder. 
RE/MAX Gujarat 
30
Taxation of REIT 
 Taxation of Dividend Income: 
 The dividend received by REIT shall be subject to 
dividend distribution tax at the level of SPV. 
 Accordingly, such dividend is exempt from tax in the 
hands of the trust. 
 Taxation of Capital Gains: 
 The income by way of capital gains on disposal of 
assets by the trust shall be taxable in the hands of the 
trust at the applicable rate. 
RE/MAX Gujarat 
31
Taxation of REIT 
 Taxation of Other Income: 
 As per section 115UA, any income of the trust other than interest, 
dividend and capital gains shall be taxable at the maximum marginal 
rate. 
 TDS u/s 194LC: 
 In case of external commercial borrowings by REIT, the benefit of reduced rate 
of 5 per cent tax on interest payments to non-resident lenders shall be 
available on similar conditions, for such period as is provided in section 194LC 
of the Act. 
 Filing of Return of Income: 
 Pursuant to section 139 (4E), all REITs are required to file return of 
their income compulsorily. 
RE/MAX Gujarat 
32
Taxation of Unit Holders
Taxation of Unit Holders 
RE/MAX Gujarat 
34 
Unit Holders 
Dividend from 
REIT 
Exempt 
Capital Gains 
Distributed by 
Trust 
Exempt 
Sale of Units 
LTCG-Exempt 
(subject to STT) 
Interest from REIT 
STCG taxable at 15% 
Taxable 
Trust will 
deduct TDS 
For non-residents – 5% 
For Residents – 10%
Taxation of Unit Holders 
 Taxation of Capital Gains on Transfer of Units of REIT: 
 The listed units of a business trust, when traded on a recognized 
stock exchange, would attract same levy of securities 
transaction tax (STT), and would be given the same tax benefits 
in respect of taxability of capital gains as equity shares of a 
company. 
 Accordingly, long term capital gains on transfer of units of REIT 
would be exempt from tax in the hands of unit holders while the 
short term capital gains would be taxable at the rate of 15% u/s 
111A of the Act. 
RE/MAX Gujarat 
35
Taxation of Unit Holders 
 Taxation of Distribution of Interest Income of 
REIT: 
 Pursuant to section 115UA, if in any previous year, the 
distributed income or any part thereof received by a 
unit holder from REIT is of the nature of interest 
income in the hands of REIT, such distributed income 
or part thereof shall be considered as income of unit 
holder and shall be chargeable for tax as income of 
the said previous year. 
RE/MAX Gujarat 
36
Taxation of Unit Holders 
 Taxation of Distribution of Dividend Income of REIT: 
 Section 10 (23FD) of the Income Tax Act provides that any 
distributed income received by a unit holder from REIT is 
exempt from tax except the income received which is in 
the nature of interest income in the hands of REIT. 
 Accordingly, the distribution of dividend income of REIT to 
unit holder is exempt from tax in the hands of unit holder. 
 Taxation of Distribution of Capital Gains of REIT:: 
 Since REIT is already charged for tax on the income of 
capital gains, unit holder is exempt from tax on account of 
distributed income of REIT from its capital gains. 
RE/MAX Gujarat 
37
Taxation of Unit Holders 
 Taxation of Distribution of Other Income of REIT: 
 Pursuant to section 10 (23FD) of the Income Tax Act, 
any distributed income received by a unit holder from 
REIT is exempt from tax except the income received 
from interest income in the hands of REIT. 
 Accordingly, the distribution of any other incomes of 
REIT to unit holder is exempt from tax in the hands of 
unit holder. 
RE/MAX Gujarat 
38
Taxation of Sponsor
Taxation of Sponsor 
RE/MAX Gujarat 
40 
Transferor / Sponsor 
Exchange of shares of SPV with 
units of the Trust 
At the inception 
It is not a taxable transfer 
Subsequent disposal of units 
of the Trust 
Acquired by way of exchange of 
shares 
Taxable as Capital Gains
Taxation of Sponsor 
 Meaning: Sponsor means any person and its associates, if any, who 
sets up the REIT and assigned as such at the time of application 
made to SEBI and who holds not less than 25% of the units of REIT 
at the time of making application for registration to SEBI. 
 Sponsor may assign its own properties to REIT against the 
allotment of units of REIT as consideration. 
 The capital gains arising to the sponsor at the time of exchange of 
shares in SPVs with units of the business trust shall be deferred and 
taxed at the time of disposal of units by the sponsor only. 
 For this purpose, an exemption has been introduced by virtue of 
clause (xvii) of section 47 which provides that any transfer of 
capital asset being share of a SPV to REIT in exchange of units of 
REIT shall not be regarded as transfer and hence no capital gains is 
chargeable. 
RE/MAX Gujarat 
41
Taxation of Sponsor 
 However, the preferential capital gains regime (consequential 
to levy of STT) available in respect of units of business trust 
will not be available to the sponsor in respect of these units 
at the time of disposal. 
 Accordingly, sponsor cannot claim the benefit of exemption 
of LTCG as envisaged in section 10 (38) and of reduced tax 
rate of 15% on STCG as envisaged u/s 111A of the Act. 
 Further, for the purpose of computing capital gain, the cost of 
these units shall be considered as cost of the shares to the 
sponsor. 
 Besides, the holding period of shares shall also be included in 
the holding period of such units. 
RE/MAX Gujarat 
42
Responsibilities of various parties to the REIT
Responsibilities of various parties to the REIT 
Responsibilities of the Trustee 
 The Trustee shall be independent of sponsor and manager and hold 
the REIT assets in the name of the REIT for the benefit of the 
investors in accordance with the Trust Deed and the proposed 
Regulations. The role of Trustee is primarily supervisory in nature. 
 The Trustee shall ensure that the activity of the REIT is being 
operated in accordance with the proposed Regulations. For 
achieving the same, certain specific obligations are also imposed 
on the Trustee, details of which have been provided in the 
proposed Regulations. 
 The right and obligation to convene meetings of the investors shall 
lie with the Trustee and he shall follow procedures for holding such 
meetings as specified in the proposed Regulations. 
RE/MAX Gujarat 
44
 Responsibilities of the Manager 
 The manager shall primarily assume all the operational responsibilities 
with respect to the activity of the REIT. Roles and responsibilities of the 
manager shall be specified in the agreement entered into between the 
trustee and the manager. 
 To ensure that the activities of the REIT are managed professionally, it 
has been specified that the manager needs to have atleast 5 years of 
related experience coupled with other requirements such as minimum 
networth, manpower with sufficient relevant experience, etc. 
 Responsibilities of manager shall range throughout the life of the REIT 
right from the application for registration, issue and listing of units of 
REIT, day to day operation and management of the assets of REIT till 
the delisting of units, if any. Manager shall be responsible for various 
operational aspects including appointment of various parties to the 
REIT, procedural aspects of issue and listing of the REIT units, 
investment decisions, disclosures and reporting, distribution of 
dividends etc. 
RE/MAX Gujarat 
45 
Responsibilities of various parties to the REIT
 Responsibilities of sponsor and the valuers 
 The sponsor’s responsibilities shall primarily pertain to setting 
up of the REIT including appointment of the Trustee. The 
sponsor shall also be obligated to maintain a certain percentage 
holding in the REIT to ensure a ‘skin-in-the-game’ at all times. 
Even in those cases where the sponsor sells its units it shall 
arrange for another person/entity to act as the re-designated 
sponsor. 
 Further, a minimum net worth and experience criteria have also 
been laid down for the sponsor in the proposed Regulations. 
 For ensuring fair and transparent valuation of the assets, the 
valuers have been obligated to follow valuation principles, have 
robust internal controls, have manpower with sufficient relevant 
experience, etc. 
RE/MAX Gujarat 
46 
Responsibilities of various parties to the REIT
How this will help real estate industry? 
 Big will be bigger 
 Liquidity for big commercial projects 
 Small investors can participate 
 Value can be unlocked 
 More transparency 
RE/MAX Gujarat
Benefits for small real estate players 
 A REIT can invest in small properties also which are 
pre-leased. 
 However properties need to be 100% clear 
 100% white money 
 Diversification requires all REIT to have their assets 
in multiple geographies and / or different type. 
 Overall good for real estate Industry 
RE/MAX Gujarat
THANK YOU

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Understanding of REIT Structure and Impact on Real Estate Industry

  • 1. Understanding of REIT Structure and Impact on Real Estate Industry Manan Choksi Regional Director RE/MAX Gujarat
  • 2. Agenda: • Background • Structures of REITs • Salient Features of SEBI Regulations • Regulatory Framework • Taxation • REIT • Sponsors • Unit Holders • Responsibilities of various parties to the REIT • How this will help real estate industry? • Benefits for small real estate players RE/MAX Gujarat
  • 5. Background Evolution of REITs Global evolution of REITs 1970s •Australia (1970) RE/MAX Gujarat Source: European Public Real Estate Association (EPRA) - Global REIT Survey 2013 REITs started in the US in 1960. Over the past 50 years, the US REITs has attracted a market capitalisation of over USD600 billion and has been adopted in several parts of the world. As of 30 June 2014, there were 456 stock exchange-listed in the FTSE EPRA/NAREIT Global Real Estate Index in 47 countries around the globe. Of the USD1.2 trillion in equity market capitalisation represented in the Developed Markets index, 78 percent came from REITs. 1960s •United States(1960) 1990s •Canada (1994) •Brazil (1995) 2000s •Japan (2000) •Singapore (2002) •France (2003) •Hong Kong (2003) •Malaysia (2006) •UK (2007) 2010s •Mexico (2011) •Pakistan (2013) •South Africa (2013) Legislative framework in place •China •India •Spain
  • 6. Evolution of REITs in India In 2007 SEBI formally introduced the draft REITs regulations for public comments. Because of downturn in the market during that period, no further development took place in the REITs regulation, until October 2013 when a second draft of the regulations was issued for public comments by SEBI. After taking industry amendments to regulations were made and the draft was approved allowing setting up and listing of REITs. Post the clarifications provided in the 2014 budget, a final draft was introduced by SEBI in August 2014. S.NO Country No. of RE/MAX Gujarat REITs Market Size (USD billion) inputs, Percentage of global REITs Market REITs performance as per S&P Dow Jones (Annual return in Percent) 5years 10 years 1 United States of America 163 621 57.68 23.80 9.58 2 Australia 52 86 8.33 18.11 5.10 3 France 37 68 6.33 20.74 16.46 4 Japan 41 64 5.98 14.84 7.78 5 United Kingdom 23 49 4.55 18.52 N.A. 6 Singapore 32 45 4.23 22.04 15.09
  • 7. REITs advantages to different stakeholders 1. Improves liquidity in the sector 1. Help improve government's revenue 2. Capital raising REITs opportunity advantages for to mid-different tier stakeholders 2. Funding through REITs could help developers especially for small facilitate other key real estate policy companies with lower/minimal credit implementation like targeting 100 smart worthiness 1. Improves liquidity in the sector cities 1. Help improve government's revenue 2. Capital raising opportunity for mid-tier 2. Funding through REITs could help developers especially for small facilitate other key real estate policy companies with lower/minimal credit implementation like targeting 100 smart worthiness cities Developers Government REITs' advantages Institutional investors Retail investors 1. Provides an exit opportunity for existing PE players, developers and financial 2. Act as an alternative financing opportunity with increase depth of Indian real estate capital markets 3. Help attract long term investors such as pension and insurance funds looking for moderate risk v/s return ratio 1. Reduces ticket size for investing in real estate sector 2. Transparent investment alternative in real estate sector with experienced professional and independent oversight 3. Easy entry and exit in the real estate sector Developers Government REITs’ advantages Institutional investors Retail investors 1. Reduces ticket size for investing in real estate sector 2. Transparent investment alternative in real estate sector with experienced professional and independent oversight 3. Easy entry and exit in the real estate sector 1. Provides an exit opportunity for existing PE players, developers and financial investors 2. Act as an alternative financing opportunity with increase depth of Indian real estate capital markets 3. Help attract long term investors such as pension and insurance funds looking for moderate risk v/s return ratio
  • 8. Background Exchange Board of India (Real Estate Investment Trusts) Regulations, 2008 Satwalekar Committee RE/MAX Gujarat 9 1996 Draft Securities & 1999 2002 2008 2008 2013 2014 SEBI (Mutual Funds) Regulations, 1996, Chapter VIA Sub-Committee set up by AMFI SEBI Notification of real estate mutual fund schemes [REMFs] Draft Securities & Exchange Board of India (Real Estate Investment Trusts) Regulations, 2013 Securities & Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 And Finance Act 2014
  • 10. REIT Institutional Funds / HNI Sponsors Investors Unit Holders Properties Management Services REIT Management Company Management Fees Property Management Company Trustee Maximum 75% Minimum 25% Investments in REIT Units Acts on behalf of Unit Holders Trustee Fees Services Fees REIT Mechanism
  • 11. REIT Structure with Borrowing Assets Liabilities Capital Invested Assets (Real Estate, etc.) Tenant Financial Institution (Lender) Unit holders Broker Stock Exchange Unit holders Real Estate Investment Advisor [Asset Manager] Investment Rent Lease Contract Borrowing Interest Repayment Investment Dividend Execution Asset Management
  • 12. REIT Structure with SPV Unit Holders REIT Indian Asset Company [SPV] Indian Real Estate Assets Trust Management Co. (the manager) Indian Promoters Trust Services Co. (the trustee) Services Company (Property Manager) Management Services Co. Acts on behalf of unit holders (Individual Property Manager) Ownership of Units Distributions Management Fees Management Services Trustee ‘s Fees Ownership > 50% Dividends and/or interest Nominates Individual Property Manager Ownership Rental Income
  • 13. Salient Features of SEBI Regulations
  • 14. Salient Features  In order to encourage set of REITs in India, SEBI has issued SEBI (Real Estate Investment Trusts) Regulations, 2014. Pursuant to the regulations, the following are the salient features of REIT:  REITs shall be set up as a trust and registered with SEBI. It shall have parties such as Trustee, Sponsor(s) and Manager.  The trustee of a REIT shall be a SEBI registered debenture trustee who is not an associate of the Sponsor/manager.  REIT shall invest in commercial real estate assets, either directly or through SPVs. In such SPVs, REIT shall hold or proposes to hold controlling interest and not less than 50% of the equity share capital or interest. Further, such SPVs shall hold not less than 80% of its assets directly in properties and shall not invest in other SPVs. RE/MAX Gujarat 15
  • 15. Salient Features  Once registered, the REIT shall raise funds through an initial offer.  Subsequent raising of funds may be through follow-on offer, rights issue, qualified institutional placement, etc.  The minimum subscription size for units of REIT shall be Rs 2 lakhs.  The units offered to the public in initial offer shall not be less than 25% of the number of units of the REIT on post-issue basis.  Units of REITs shall be mandatorily listed on a recognized Stock Exchange and REIT shall make continuous disclosures in terms of the listing agreement. Trading lot for such units shall be Rs 1 Lakh. RE/MAX Gujarat 16
  • 16. Salient Features  For coming out with an initial offer, the value of the assets owned/proposed to be owned by REIT shall be of value not less than Rs 500 crore. Further, minimum issue size for initial offer shall be Rs 125 crore.  A REIT may have multiple sponsors, not more than 3, subject to each holding at least 5% of the units of the REIT. Such sponsors shall collectively hold not less than 25% of the units of the REIT for a period of not less than 3 years from the date of listing. After 3 years, the sponsors, collectively, shall hold minimum 15% of the units of REIT, throughout the life of the REIT. RE/MAX Gujarat 17
  • 17. Salient Features  Not less than 80% of the value of the REIT assets shall be in completed and revenue generating properties.  Not more than 20% of the value of REIT assets shall be invested in following: i. developmental properties, ii. mortgage backed securities, iii. listed/ unlisted debt of companies/body corporates in real estate sector, iv. equity shares of companies listed on a recognized stock exchange in India which derive not less than 75% of their operating income from Real Estate activity, v. government securities, vi. money market instruments or Cash equivalents.  However investments in developmental properties shall be restricted to 10% of the value of the REIT assets.  A REIT shall invest in at least 2 projects with not more than 60% of value of assets invested in one project. Detailed investment conditions are provided in the Regulations. RE/MAX Gujarat 18
  • 18. Salient Features  REIT shall distribute not less than 90% of the net distributable cash flows, subject to applicable laws, to its investors, at least on a half yearly basis.  REIT, through a valuer, shall undertake full valuation on a yearly basis and updation of the same on a half yearly basis and declare NAV within 15 days from the date of such valuation/updation.  The borrowings and deferred payments of the REIT at a consolidated level shall not exceed 49% of the value of the REIT assets. In case such borrowings/ deferred payments exceed 25%, approval from unit holders and credit rating shall be required.  Detailed provisions for related party transactions. valuation of assets, disclosure requirements, rights of unit holders, etc. are provided in the Regulations. However, for any issue requiring unit holders’ approval, voting by a person who is a related party in such transaction as well as its associates shall not be considered. RE/MAX Gujarat 19
  • 20. Regulatory framework Salient features of the Regulatory Framework are as under: Structure of the REIT  The REIT shall be set up as a Trust under the provisions of the Indian Trusts Act, 1882. REITs shall not launch any schemes.  The REIT shall have parties such as trustee (registered with SEBI), sponsor, manager and principal valuer. Registration of REIT  The Trust shall initially apply for registration with SEBI as a REIT in the specified format. It shall fulfill eligibility criteria as specified in the draft Regulations.  SEBI, on being satisfied that the eligibility conditions are satisfied, shall grant the REIT certificate of registration. RE/MAX Gujarat 21
  • 21. Regulatory Framework Offer of units to the public and listing of units  After registration, the REIT shall raise funds initially through an initial offer and once listed, may subsequently raise funds through follow-on offers.  Listing of units shall be mandatory for all REITs. The units of the REIT shall continue to be listed on the exchange unless delisted under the Regulations. Provisions for delisting have also been specified in the Regulations.  For coming out with initial offer, it has been specified that the size of the assets under the REIT shall not be less than Rs. 500 crore which is expected to ensure that initially only large assets and established players enter the market.  Further, minimum initial offer size of Rs. 125 crore and minimum public float of 25% is specified to ensure adequate public participation and float in the units. RE/MAX Gujarat 22
  • 22. Offer of units to the public and listing of units [contd.]  General procedure for initial/follow-on offer, filing of offer document/follow-on offer document, allotment and listing of units has been specified in the Regulations. Detailed disclosures required in the offer document/follow-on offer document have also been specified in the Regulations.  The REIT may raise funds from any investors, resident or foreign. However, initially, till the market develops, it is proposed that the units of the REITs may be offered only to HNIs/institutions and therefore, it is proposed that the minimum subscription size shall be Rs. 2 lakhs and the unit size shall be Rs. 1 lakh. RE/MAX Gujarat 23 Regulatory Framework
  • 23. Regulatory Framework Investment Conditions and Dividend Policy  In line with the nature of the REIT to invest primarily in completed revenue generating properties, it has been mandated that at least 90% of the value of the REIT assets shall be in completed revenue generating properties. In order to provide flexibility, it has been allowed to invest the remaining 10% in other assets as specified in the proposed Regulations.  To ensure regular income to the investors, it has been mandated to distribute at least 90% of the net distributable income after tax of the REIT to the investors.  REITs have been allowed to invest in the properties directly or through special purpose vehicles, wherein such special purpose vehicles (SPV) hold not less than 90% of their assets directly in such properties. However, in such cases, it has been mandated that REIT shall have control over the SPV so that the interest of the investors of the REIT are not jeopardized.  The REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage backed securities. Further, the REIT shall only invest in assets based in India.  Investment upto100% of the corpus of the REIT has been permitted in one project subject to the condition that minimum size of such asset is not less than Rs. 1000 crores.  Other detailed investment conditions are provided in the proposed Regulations. RE/MAX Gujarat 24
  • 24. Regulatory Framework Related Party Transactions [RPT]:  All related party transactions shall be on an arms-length basis, in the best interest of the investors, consistent with the strategy & investment objectives of the REIT and shall be disclosed to the exchanges and investors periodically in accordance with the listing agreement and the proposed Regulations.  Stringent conditions have been imposed on related party transactions including detailed disclosures, valuation requirements, approval from majority of investors, related party abstaining from voting, restrictions on leasing of assets to related parties, requirement of fairness opinion for lease, etc.  For any related party transactions for acquisitions/sale of properties, valuation reports from 2 independent valuers shall be obtained and the transaction for purchase/sale of such properties shall be at a price not greater / less than average of the two independent valuations.  Investors' approval is required for all the related party transactions wherein the value is above a threshold as provided in the proposed regulations. RE/MAX Gujarat 25
  • 25. Borrowings and deferred payments  To avoid excessive leverage, the aggregate consolidated borrowings and deferred payments of the REIT have been capped at 50% of the value of the REIT assets. If the same exceeds 25%, requirement of credit rating from a credit rating agency and approval of majority of investors has been specified. Valuation of assets  To ensure that the underlying assets of REIT are valued accurately, requirement of a full valuation including a physical inspection of the properties has been specified at least once a year. Further, a six monthly updation in the valuation capturing key changes in the last six months has also been specified. Consequently, the NAV shall be declared at least twice in a year. Provisions have also been specified for valuation in case of any material development.  Detailed disclosures have been specified for the annual and half-yearly valuation reports.  Further, for any purchase of a new property or sale of an existing property, it has been required that a full valuation be undertaken and the value of the transaction shall be not less than 90%/ not more than 110% of the assessed value of the property for sale/purchase of assets respectively. RE/MAX Gujarat 26 Regulatory Framework
  • 26. Rights of investors  In order to ensure safeguarding of interests of the investors, several rights have been provided to the investors in order to empower them.  The investors shall have right to remove the manager, auditor, principal valuer, seek delisting of units, apply to SEBI for change in trustee, etc.  Further, an annual meeting of all investors is mandatory to be convened by the Trustee wherein matters such as latest annual accounts, valuation reports, performance of the REIT, approval of auditors & their fees, appointment of principal valuer, etc. shall be discussed.  Further, approval of investors has been made mandatory in special cases such as certain related party transactions, any transaction with value exceeding 15% of the REIT assets, borrowing exceeding 25%, change in manager/ sponsor, change in investment strategy, delisting of units, etc.  In order to ensure that a related party does not influence the decision, it has been specified that any person who is a party to any transaction as well as associates of such person(s) shall not participate in voting on the specific issue. RE/MAX Gujarat 27 Regulatory Framework
  • 28. Taxation of REIT RE/MAX Gujarat 29 Business Trust [REITs] Interest From SPV Exempt u/s 10(23FC) SPV not required to deduct TDS Distributed to profit holders TDS deductible by Trust For Resident – 10% For Non-Resident – 5% Dividend from SPV Exempt in the hands of Trust SPV will not pay Distributed to Unit Holders No requirement of DDT Capital Gains Sale of shares of SPV/Real Estate Assets Taxable as LTCG/STCG in the hands of Trust Distributed to Unit Holders Other Income of Trust Taxable in the hands of Trust At maximum marginal rate [30%] Distributed to Unit Holders
  • 29. Taxation of REIT  Taxation of Interest Income of REIT:  The income by way of interest received by REIT is given pass through treatment i.e., there is no taxation of such interest income in the hands of the trust.  Attention is invited to section 10 (23FC) of the Income Tax Act which provides that any income of REIT by way of interest is exempt from tax.  However, pursuant to section 194LBA, withholding tax at the rate of 5 per cent is applicable in case of payment of interest component of income distributed to non-resident unit holders and 10 per cent is applicable in respect of payment of interest component of distributed income to a resident unit holder. RE/MAX Gujarat 30
  • 30. Taxation of REIT  Taxation of Dividend Income:  The dividend received by REIT shall be subject to dividend distribution tax at the level of SPV.  Accordingly, such dividend is exempt from tax in the hands of the trust.  Taxation of Capital Gains:  The income by way of capital gains on disposal of assets by the trust shall be taxable in the hands of the trust at the applicable rate. RE/MAX Gujarat 31
  • 31. Taxation of REIT  Taxation of Other Income:  As per section 115UA, any income of the trust other than interest, dividend and capital gains shall be taxable at the maximum marginal rate.  TDS u/s 194LC:  In case of external commercial borrowings by REIT, the benefit of reduced rate of 5 per cent tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in section 194LC of the Act.  Filing of Return of Income:  Pursuant to section 139 (4E), all REITs are required to file return of their income compulsorily. RE/MAX Gujarat 32
  • 32. Taxation of Unit Holders
  • 33. Taxation of Unit Holders RE/MAX Gujarat 34 Unit Holders Dividend from REIT Exempt Capital Gains Distributed by Trust Exempt Sale of Units LTCG-Exempt (subject to STT) Interest from REIT STCG taxable at 15% Taxable Trust will deduct TDS For non-residents – 5% For Residents – 10%
  • 34. Taxation of Unit Holders  Taxation of Capital Gains on Transfer of Units of REIT:  The listed units of a business trust, when traded on a recognized stock exchange, would attract same levy of securities transaction tax (STT), and would be given the same tax benefits in respect of taxability of capital gains as equity shares of a company.  Accordingly, long term capital gains on transfer of units of REIT would be exempt from tax in the hands of unit holders while the short term capital gains would be taxable at the rate of 15% u/s 111A of the Act. RE/MAX Gujarat 35
  • 35. Taxation of Unit Holders  Taxation of Distribution of Interest Income of REIT:  Pursuant to section 115UA, if in any previous year, the distributed income or any part thereof received by a unit holder from REIT is of the nature of interest income in the hands of REIT, such distributed income or part thereof shall be considered as income of unit holder and shall be chargeable for tax as income of the said previous year. RE/MAX Gujarat 36
  • 36. Taxation of Unit Holders  Taxation of Distribution of Dividend Income of REIT:  Section 10 (23FD) of the Income Tax Act provides that any distributed income received by a unit holder from REIT is exempt from tax except the income received which is in the nature of interest income in the hands of REIT.  Accordingly, the distribution of dividend income of REIT to unit holder is exempt from tax in the hands of unit holder.  Taxation of Distribution of Capital Gains of REIT::  Since REIT is already charged for tax on the income of capital gains, unit holder is exempt from tax on account of distributed income of REIT from its capital gains. RE/MAX Gujarat 37
  • 37. Taxation of Unit Holders  Taxation of Distribution of Other Income of REIT:  Pursuant to section 10 (23FD) of the Income Tax Act, any distributed income received by a unit holder from REIT is exempt from tax except the income received from interest income in the hands of REIT.  Accordingly, the distribution of any other incomes of REIT to unit holder is exempt from tax in the hands of unit holder. RE/MAX Gujarat 38
  • 39. Taxation of Sponsor RE/MAX Gujarat 40 Transferor / Sponsor Exchange of shares of SPV with units of the Trust At the inception It is not a taxable transfer Subsequent disposal of units of the Trust Acquired by way of exchange of shares Taxable as Capital Gains
  • 40. Taxation of Sponsor  Meaning: Sponsor means any person and its associates, if any, who sets up the REIT and assigned as such at the time of application made to SEBI and who holds not less than 25% of the units of REIT at the time of making application for registration to SEBI.  Sponsor may assign its own properties to REIT against the allotment of units of REIT as consideration.  The capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust shall be deferred and taxed at the time of disposal of units by the sponsor only.  For this purpose, an exemption has been introduced by virtue of clause (xvii) of section 47 which provides that any transfer of capital asset being share of a SPV to REIT in exchange of units of REIT shall not be regarded as transfer and hence no capital gains is chargeable. RE/MAX Gujarat 41
  • 41. Taxation of Sponsor  However, the preferential capital gains regime (consequential to levy of STT) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal.  Accordingly, sponsor cannot claim the benefit of exemption of LTCG as envisaged in section 10 (38) and of reduced tax rate of 15% on STCG as envisaged u/s 111A of the Act.  Further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor.  Besides, the holding period of shares shall also be included in the holding period of such units. RE/MAX Gujarat 42
  • 42. Responsibilities of various parties to the REIT
  • 43. Responsibilities of various parties to the REIT Responsibilities of the Trustee  The Trustee shall be independent of sponsor and manager and hold the REIT assets in the name of the REIT for the benefit of the investors in accordance with the Trust Deed and the proposed Regulations. The role of Trustee is primarily supervisory in nature.  The Trustee shall ensure that the activity of the REIT is being operated in accordance with the proposed Regulations. For achieving the same, certain specific obligations are also imposed on the Trustee, details of which have been provided in the proposed Regulations.  The right and obligation to convene meetings of the investors shall lie with the Trustee and he shall follow procedures for holding such meetings as specified in the proposed Regulations. RE/MAX Gujarat 44
  • 44.  Responsibilities of the Manager  The manager shall primarily assume all the operational responsibilities with respect to the activity of the REIT. Roles and responsibilities of the manager shall be specified in the agreement entered into between the trustee and the manager.  To ensure that the activities of the REIT are managed professionally, it has been specified that the manager needs to have atleast 5 years of related experience coupled with other requirements such as minimum networth, manpower with sufficient relevant experience, etc.  Responsibilities of manager shall range throughout the life of the REIT right from the application for registration, issue and listing of units of REIT, day to day operation and management of the assets of REIT till the delisting of units, if any. Manager shall be responsible for various operational aspects including appointment of various parties to the REIT, procedural aspects of issue and listing of the REIT units, investment decisions, disclosures and reporting, distribution of dividends etc. RE/MAX Gujarat 45 Responsibilities of various parties to the REIT
  • 45.  Responsibilities of sponsor and the valuers  The sponsor’s responsibilities shall primarily pertain to setting up of the REIT including appointment of the Trustee. The sponsor shall also be obligated to maintain a certain percentage holding in the REIT to ensure a ‘skin-in-the-game’ at all times. Even in those cases where the sponsor sells its units it shall arrange for another person/entity to act as the re-designated sponsor.  Further, a minimum net worth and experience criteria have also been laid down for the sponsor in the proposed Regulations.  For ensuring fair and transparent valuation of the assets, the valuers have been obligated to follow valuation principles, have robust internal controls, have manpower with sufficient relevant experience, etc. RE/MAX Gujarat 46 Responsibilities of various parties to the REIT
  • 46. How this will help real estate industry?  Big will be bigger  Liquidity for big commercial projects  Small investors can participate  Value can be unlocked  More transparency RE/MAX Gujarat
  • 47. Benefits for small real estate players  A REIT can invest in small properties also which are pre-leased.  However properties need to be 100% clear  100% white money  Diversification requires all REIT to have their assets in multiple geographies and / or different type.  Overall good for real estate Industry RE/MAX Gujarat