REIT Simplified

NITIN PAHILWANI

Chartered Accountant

November, 2013

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REAL ESTATE INVESTMENT TRUST Real estate in India has witnessing rapid growth and development since last one decade and with a robust economic growth and growing scale of operation, significance of real estate will further increase. Real estate is one of the important investment instrument in india. REITs are existed in and over 30 countries worldwide and REITs own approximately $1 trillion of commercial real estate assets, including listed and non-listed REITs. In US itself, 172 listed REITs on NYSE has a market capitalization of $619 billion [by NAREIT]. REIT is high dividend yield investment instruments worldwide and has historically increased investor’s total return and lowered the overall risk. REIT is collective pooled investment instrument just like Mutual Fund, invest primarily in Real estate of completed and revenue generating properties. The Rental income generated will be distributed among investors. Real estate investment is not liquid investment it require large amount to be invested in property. While REIT is professionally managed liquid investment option, investor can invest in smaller amount and have exposure to real estate as well as diversify its portfolio. SEBI issued consultation paper on draft Real Estate Investment Trusts (REITs) Regulations, 2013 in October. After received response/feedback from public it will come out with final regulation.

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ELIGIBILITY CRITERIA

Trust It should be Registered Trust and Trust deed has its main objective as undertaking the activity of REIT. The trustee to REIT is to registered with SEBI under SEBI (Debenture Trustees) Regulations, 1993, is not an associate of the Parties to REIT and 50% of its directors are independent and are not related parties to the REIT Sponsor Sponsor has a net worth of ` 20 Crore and having 5 years of experience in the real estate industry Manager Manager has a net worth of ` 5 Crore. Manager and its 2 key personnel in its Investment Committee have an experience of 5 years in Fund Management /Advisory Services/Property Management in real estate industry or in development of real estate. Half Members of the Investment Committee are independent and are not related parties to the REIT Principal Valuer Principal Valuer is not an associate of Parties to REIT and has an experience of 5 years.

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RIGHTS AND RESPONSIBILITIES

There are specific rights and responsibility of parties to REIT viz Trustee, Sponsor, Manager and Principal Valuer under the regulation Trustee The regulation imposes fiduciary responsibility and duties on Trustee of the REIT. Trustee is not allowed to invest in REIT units. Trustee shall ensure that REIT Assets have legal and marketable titles and all the material contracts are legal, valid, binding and enforceable. Trustee has a responsibility for supervision, appointment, removal of the Manager. Trustee is to enter into the investment management agreement with the Manager on behalf of the REIT.

The Trustee has the obligation to ensure that the REIT is operating in accordance with the provisions of the trust deed, the offer document and the Draft Regulations.

The role of trustees had been inspired from the mutual fund regulations. However, unlike the mutual fund regulations, the Trustee in case of a REIT cannot be an associate of the Sponsor, Manager or Principal Valuer. Manager Manager identifies, recommend investment and manage the REIT assets, manage either directly or through the appointment and supervision of appropriate agents.

The manager shall appoint the principal valuer, any other valuer(s), auditor, registrar and transfer agent, merchant banker, custodian and any other intermediary/service provider/agent for managing the assets of the REIT

Manager computes and declares REIT NAV once every six months. And deals with SEBI and Stock exchanges. Sponsor The sponsor shall set up the REIT and appoint the trustee of the REIT

The Sponsor shall hold 25% of the total units prior to initial public offer with a lock in of 3 years from the date of the listing of such units. Units exceeding 25% shall be locked in for a period of 1 year from the date of listing of such units.

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However Minimum holding shall not fall below 15% of the outstanding REIT units at all times.

After 3 years from the listing, sponsor can to sell units below minimum holding by arranging another person/entity to act as a Sponsor and obtain approval from unit holders. The Re-designated sponsor shall hold not less than 15% of the outstanding units of REIT at all times. Principal Valuer “Principal Valuer” is a "registered valuer" under Section 247 of the Companies Act, 2013. The valuer shall not invest in units of the REIT.

The Principal Valuer shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment for discharging its duties with in an efficient and competent manner, utilizing its knowledge, skills and experience in best possible way to complete given assignment.

The principal valuer shall be changed not less than every 2 years and the new principal valuer, not an associate of previous one has been appointed.

90% of value of the REIT assets shall be invested in completed and rent generating properties

90% of net distributable income after tax of the REIT shall be distributed as dividend to investors

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LISTING CONDITIONS

· Registered REIT with Minimum assets of ` 1000 crore.

· Offer size is of ` 250 Crore and Market Float of 25% of the value of the REIT

· Face value of one unit of the REIT shall be rupees one lakh and

Minimum application for public offer is two lakhs.

· Initial offer and follow-on offer will be open for subscription for a period of 45 days and 30 days respectively.

· Money collected from all applicants shall be refunded within 15 days

from the closure of the issue, In case REIT Issue is not subscribed atleast 75% of the issue size, or subscribers to the issue are less than 20 in numbers.

· REIT can retain oversubscription to the extent of 25% of the issue

size.

· REIT shall be mandatory to be listed on stock exchange in 15 days

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INVESTMENT CONDITIONS

1. Not less than 90% of value of the REIT assets shall be invested in completed and rent generating properties.

2. REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage backed securities.

3. Not more than 10% of value of the REIT assets shall be invested in a. Developmental properties b. Listed or unlisted debt of companies c. mortgage backed securities d. Equity shares of Listed Real Estate companies e. Government securities f. Money market instruments or Cash equivalents

4. REIT may invest in through Special Purpose Vehicles subject to

a. The REIT shall hold controlling interest and 51% of equity share capital

b. Manager after consulting with Trustees appoint at least 1 authorised representative on the Board

c. Such SPV shall hold at least 90% of the assets directly in such properties and shall not invest in other SPV.

5. If, on account of Market Movement, such specified conditions

breached then manager shall ensure that such conditions are satisfied within 6 months

6. REIT shall not invest in other REIT units and 75% of the revenues of the REIT other than gains arising from disposal of properties shall be from rental, leasing and letting real estate assets at all times.

7. 90% of net distributable income after tax of the REIT shall be

distributed as dividend to the unit holders

Aggregate consolidated borrowings and deferred payments of the REIT shall never exceed 50% of the value REIT assets

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RELATED PARTY TRANSACTION

All related party transactions shall be on an arms-length basis, in the best interest of the unit holders, consistent with the strategy & investment objectives of the REIT and shall be disclosed to the exchanges and unit holders periodically in accordance with the listing agreement and these Regulations

Two valuation reports from different valuers, independent of each other, shall be obtained and Transactions for purchase/sale of such assets shall be at a price not greater / less than average of the two independent valuations respectively

After Initial Public Offer, Approval from the unit holders shall be obtained prior to entering into single transaction or any such subsequent transaction with any related party if

· Transactions pertaining to acquisition/sale exceeds 5% of the value of REIT or

· Rentals exceeds 5% of the total rentals of the REIT or · Value of the funds borrowed exceeds 5% of the total consolidated

borrowings of the REIT

Quantum of transaction with related party shall be limited to 20% of underlying area/lease/asset value.

Transaction between REIT’s with a common manager or sponsor, shall be deemed to be related party transactions

BORROWINGS AND DEFERRED PAYMENTS

Aggregate consolidated borrowings and deferred payments of the REIT shall never exceed 50% of the value REIT assets. For any further borrowing above 25% of the value of REIT asset then approval of Unit holder and credit rating shall be obtained. If such condition breached on account of market movement, the manager shall ensure to satisfy such condition within 3 months.

VALUATION OF ASSET Full Valuation including physical inspection conducted by principal valuer. The property shall not purchase at 110% of the value and shall not sell at 90% of value as assessed by Principal Valuer.

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AUDITOR

Audit of accounts of the REIT by the auditor is done not less than twice every year and such report is submitted to the exchanges within 45 days of such half-year ending March and September.

Auditor may be appointed for a maximum period of 3 years, which may be extended to another 3 year subject to unit holders’ approval. An Auditor cannot be consecutively appointed for a period of more than 6 years.

For more details contact Nitin Pahilwani Email: ntpahilwani@yahoo.com, ntpahilwani@gmail.com http://in.linkedin.com/in/ntpahilwani For private circulation only The information contained herein is of general nature, not intended to address the circumstances of any particular individual or entity and the reader’s personal non commercial use only. Although I endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that will continue to accurate in future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.