Reits: 10 things you wanted to know

The budget this week allowed REITS tax pass through status

The finance minister cleared a roadblock in the way of real estate investment trusts (Reits) by giving these tax pass-through status. The Securities and Exchange Board of India (Sebi) is said to be working on notifying final norms, which may take effect soon. It had put out draft rules for discussion in October. Business Standard studies these to understand what the first Reits could look like.

What are Reits?
These are vehicles that hold and manage large commercial rent-earning properties on behalf of investors. The latter invest in Reits’ units. Rental income is given to unit holders.

The proposed structure
Each Reit will have a manager, sponsor and trustee. It will have a five-member investment panel.  

Eligibility criteria for sponsors, managers
Enough to keep non-serious players away, but seem loose change for big realty companies such as DLF. The manager should have a net worth Rs 5 crore, the sponsor Rs 20 crore. The manager is required to have five years’ experience in fund management/ advisory services/property management in the real estate sector.

Reit of ancestral property?
Yes. But a hurdle would be the minimum asset size of Rs 1,000 crore.

Should asset be a single property?
Not necessarily. A Reit can hold multiple properties and can go for a public offering if these are more than Rs 1,000 crore.

Property valuation?
Sales and purchases by trusts will require two independent valuers. One will be a principal valuer. A six month update has been specified. So the NAV shall be declared at least twice a year.  

Listing?
Compulsory. The Reit can raise money from unit holders by offering not less than 25 per cent of stake or Rs 250 crore to the public.

If offer doesn’t see interest?
If the offer is unable to shore up a minimum subscription of 75 per cent, the Reit is required to refund money.

Cost to investor for Reits?
A lot less than you would spend on a piece of property, but a lot more than on a single share. The minimum unit size is expected to be Rs 1 lakh and minimum subscription Rs 2 lakh. So a person has to buy at least two units. Sebi proposes to test the instrument initially with more informed investors.

Safeguards for unit holders?
Sebi has prescribed rights of the unit holders under Chapter IV of the draft rules. These empower holders to meet and vote on key issues. They have the power to appoint or remove valuers, managers and auditors.