A REIT is a vehicle that enables owners of real estate to pool primarily income generating assets together in a portfolio. REITs give all investors access to the benefits of real estate investment with the advantage of investing in publicly traded units.
REITs are universally accepted by global institutions and individual investors as product that provides liquidity, transparency, diversification, dividends, and performance.
In India REITs are governed by SEBI (Real Estate Investment Trusts) Regulations, 2014 which primarily lay down the framework in line with the global REIT’s standards including:
Minimum 80% of total value of assets to be comprising of completed and income generating properties
Net Debt to not exceed 49% of total asset value
Minimum 90% of distributable cash flows to be distributed
REITs are typically listed on stock exchanges through an Initial Public Offering (IPO).
‒ Once listed, they serve as permanent capital vehicles to raise debt and equity in the capital markets to acquire new assets to grow.
No. The first REIT started in the US in the 1960s and was designed to allow small investors to participate in the benefits of owning commercial real estate.
REITs exist in a number of different subsectors of the economy including office, industrial, apartments, hotels, logistics, shopping centers, malls and data centers, among others.
The first Indian REIT was listed in April 2019.
REITs are tax-efficient vehicles universally accepted by global institutions and individual investors as a safe and transparent way to invest in income producing real estate.
Real estate has always played an important role in a global asset allocation strategy. REITs enable investors to participate in the potential capital appreciation of the underlying real estate assets.
REITs are liquid, allow investors to invest and trade in small amounts, and represent ownership in a real estate vehicle while leaving the management to professionals.
REITs are highly governed and transparent.
In India, the regulations mandate that REITs have to pay out at least 90% of net distributable cash flows to unitholders on a semi-annual basis.
REITs must have at least 80% of their assets (by value) invested in income-producing assets. A low level of development (20% or less) means less risk to the cash flows.
Net Debt to not exceed 49% of total asset value.
The unitholder does NOT pay dividend distribution tax on the dividend portion of the distributions they receive, provided the SPVs fulfil certain conditions under the extant tax laws.
In a related party transaction, the purchase of assets shall be at a price not greater than 110% of the average of the two independent valuations and the sale of assets shall not be at a price lesser than 90% of the average of the two independent valuations.
Conceptually, REITs are a mix of both. The distributions give the REITs the regularity of a variable-rate coupon, but an investor also gets the underlying growth of the business backing the REIT (much like an equity instrument). This growth could be through rental growth or through the macroeconomic drivers leading to higher rates of employment and hence, demand for class A office space.
REITs trade on equity exchanges like stock. In developed markets, there are ETFs and Mutual funds that focus entirely on REITs. In certain markets, the number of listed REITs outweighs that of real estate operating companies.
REITs typically receive cash flows from the SPVs through a combination of interest income on shareholder debt, repayment of principal on shareholder debt and dividends.
REITs have to mandatorily pay out at least 90% of net distributable cash flows to unitholders on a semi-annual basis.