Sebi revises REITs norms but a lot still needs to be done

In a move to bring in flexibility in the composition of RIETs (Real estate investment trust), the market watchdog Sebi (security exchange & board of India) came out with a consultation paper on amendments to the REIT regulations 2014.

The amendment was focused on on under-construction properties, special purpose vehicle (SPV), hotels, hospitals and convention centres and related party transactions.

Abhishek Anand, analyst of JM Financial says, "While the amendments look to address listing issues, we await tax law modifications in line with amendments proposed to improve returns to unit holders."

The analyst believes REIT’s listing will be dependent on asset fundamentals and valuation expectations of sponsors or developers.”

Following are the views of every norm that has been revised by Sebi.

Special Vehicle Purpose(SPV): Sebi has proposed to ease the limitation structure of REITs in terms of SPVs.  It has allowed REITs to invest in holding companies which have investments in other SPVs, which eventually hold the real estate assets.

This proposal is believed to provide smooth-running of REIT structure with existing holding structures, which will support in minimizing transaction cost involved, says JM Financials.  

Earlier law of REIT-owning SPVs needed a consolidation of these individual SPVs, recording in significant transaction costs - as change in ownership from holding company to the REIT resulted in transaction charges.

In regards to taxation, JM Financial viewed that dividend distribution tax (DDT) is still applicable for REIT’s step-down SPVs.  An exemption from DDT for step-down subsidiaries will be critical for improving unit holders’ returns.

As per earlier norms, the DDT is exempt for domestic industries in which a business trust has become the holder of whole nominal value of a company’s equity share capital.

Hotels, Hospital & Convention centers: Ministry of Finance views  hotels, hospitals and convention centers  as infrastructure. But according to Sebi, these assets should come under the category of ‘real estate’ or ‘property’ under REITs as the intention is to include rent-generating properties.

In regards to inclusion of these centers, JM Financials says, "it is in line with international REIT assets, where there are dedicated hospitality and hybrid REITs, including hotels and hospitals along with commercial and retail assets."

Under-construction properties: To enhance REITs further, the regulator proposed allowing  investors to double their investment from the earlier 10% in these section. Also, keeping the rule unchanged, Sebi stated that 80% investment in completed and rent generating properties will continue. Hence,  increasing the path for REITs to invest in different stages of asset construction.

This approval will result in REITs benefiting from investing in under-construction property, while still having 80% of investment in completed assets. In addition, the norms are in line with competing REITs (Singapore-REITs development component at 25%), added JM Financial.

Reduction related party transaction: The regulator plans to ease the requirement of approval for related party transactions from 60% to 50% of unit holders and 75% to 60% in case of special resolutions.

In both cases, related party votes will not be taken into account. The approval requirements remain higher than that under the Companies Act. We are wary of any further dilution in consent requirement for related party transactions, explained JM Financial.