SUB: NOTE ON REAL ESTATE INVESTMENT TRUSTS (REITs)
A) BRIEF INFORMATION:-
A real estate investment trust (REIT) is a closed-end investment company that owns assets related to real estate such as buildings, land and real estate securities. It is a modern real estate instrument.
B) HOW IT WORKS:-
REITs raise money from a collection of investors and provide them with access to real estate. Publically traded REITs raise money for their portfolios by selling shares on an exchange. Private REITs must find individual investors.
REITs are legally required to distribute at least 90% of their taxable income to investors. Income comes from the rent, managing fees and leasing of the properties.
Mortgage REITs, which invest primarily in mortgages and other debt products related to real estate, receive income from the payments borrowers make toward the mortgages the REIT owns. Mortgage REITs are more akin to a bond investment rather than a straight real estate investment
C) REITS IN INDIA:-
REITS Collects money from investors and collected money will be invested in commercial properties which are completed and are generate income. The REIT will have to first get registered and raise funds through an initial public offer or IPO. Units of REITs will have to be compulsorily listed on exchanges and will be traded like securities.
D) TYPES OF REITS:-
There are two primary types of REITs:
- Equity REITs
- Mortgage REITs.
- Hybrid REITs.
The Three types give investors the opportunity to invest in either the equity financing or the debt financing of real estate.
Equity REITs: Equity REITs are real estate companies that purchase commercial properties and rent them out in order to generate income. Equity REITs are a good choice for investors who want a piece of the commercial real estate action without actually having to go out and buy property.
Mortgage REITs: Mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities (MBS) and earning income from the interest on these investments.
Hybrid REITs: These REITs use the investment strategies of both equity and mortgage REITs.
E) PARTIES TO THE REITS INCLUDE:
- Trust and Trustee
- Sponsor Group
- Re- designated sponsor
F) REGISTRATION OF REAL INVESTMENT TRUST:
- No person shall act as a REIT unless it is registered
- Application for grant of certificate of registration as REIT shall be made, by the sponsor
- The SEBI may, in order to protect the interests of investors, appoint any person to take charge of records, documents of the REIT and for this purpose, also determine the terms and conditions of such an appointment.
- Satisfy fit and proper criteria given by SEBI regulations.
G) ELIGIBILITY OF REITS:
- The applicant is trust and trust is registered under trust act, 1908.
- Main objective of trust having undertaking activity of REIT.
- persons have been designated as sponsor, manager and trustee all such persons are separate entities
- Criteria for Sponsor:
- Each Sponsor hold or Propose to hold at least 5% of the units of REIT
- Sponsors on a collective basis having a NET WORTH at Least 100 Crore
- Each sponsor having 20 Crore NET WORTH
- Sponsor or its associates having experience of 5 years in Development of real estate and if Sponsor is Developer atleast 2 Projects Completed.
- Criteria for Manager:
- Having Net Worth at least 10 Crore
- At Least 5 years experience in fund management or advisory services or property management in the real estate industry or in development of real estate.
- Manager has at least 2 key Personnel having 5 Years Experience.
- Criteria For Trustee:
- Trustee is Registered with SEBI
- Trust having all Infrastructure
- The applicant has clearly described details pertaining to proposed activities of the
- Applicant followed fit and proper criteria given by SEBI
- If any previous REIT certificate granted to the REIT or their directors/members of governing board, the SEBI may reject the application.
H) ADVANTAGES OF INVESTING IN REITS:
- REITs are not as capital intensive as a direct investment in property. Moreover, there are not many profitable investment opportunities left at present
- It is easier to invest in real estate using REITs
- Compared to direct investment in real estate, REITs have lower liquidity risk
- REITs are regulated by SEBI; hence chances of fraud are very rare
- These are transparent as they disclose the capital portfolio annually and semi
- These offer a relatively higher dividend as approximately 90% of income is paid as a dividend to the REIT investors.
I) SCOPE OF REITs:
The scope of the REITs is to give investors dividends generated from capital gains that are accrued from the selling of commercial assets. The REIT allocates 90% of its income as dividends to its investor’s.
- It provides a safe and diversified investment opportunity.
- The REITs are transparent. There is a full valuation of the REIT every year along with a half-yearly update.
- As per the guidelines, REITs have to invest in at least two projects with the value of one asset comprising 60% of the investment.
- There is low risk involved in REITs as a minimum of 80% of the assets are invested in revenue-generating projects that are completed. The rest 20% is allocated to investments in equity shares of properties that are listed, mortgage-based securities, equity shares deriving at least 75% of income from real estate activities, government securities, money market instruments, cash equivalents, and so on.
J) DOCUMENTS REQUIRED FOR REGISTRATION:
An indicative list of documents/information to be furnished along with the application. All documents/information is to be submitted in duplicate.
- Details of Trust with object
- Details of Trustee
- KYC Details of Sponsor
- Key Details of Manager
- Net worth certificate for sponsor and Manager
- Copy of MOA and AOA.
- Previous years financial statements trust, sponsor, and manager
- List of Directors/ Members of Governing Board of Manager and Sponsors
- Shareholding pattern of Directors/Partners
- Current Accounts Details
- Board Resolution to authorized Director to fill Application
- Bankers’ report on the functioning of the applicant account and its financial health in sealed cover
- List of Shareholding Pattern of company
- Details of infrastructure for conducting activities as an Real Estate Investment Trust
- Experience certificate of Manager and Sponsor
- Details of business plan and investment strategy
- Declaration that the sponsor(s) shall individually hold not less than 5% of the units of the REIT on post initial offer basis
- Details of regulatory action taken in the past, if any
PLACE OF RENDERING SERVICES.
The place of rendering services generally shall be our office situated at 2nd Floor, 496/B, Om Apartment, Near KCC Classes, Kasba Peth, Pune – 411 011, Maharashtra, India.
Pramodkumar R. Ladda
Company Secretary & Insolvency Professional
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