Will recent policy changes spur REITs and InvITs in India?

Although real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) are popular in the European and American markets, they have not had an enthusiastic launch in India. Since the introduction of the REIT Regulations and the InvIT Regulations, only a handful of InvITs, such as IRB InvIT Fund and Indiagrid Trust and have been listed. No REITs have been listed on any stock exchange.

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REIT and InvIT regulations in overseas markets

REIT as a trust structure, first emerged in the United States. Typically, REIT structures (which are regulated by the US Securities and Exchange Commission) allow investments to be made in commercial real estate, without actual ownership of such commercial real estate. In the US, REITs fall into three major categories, namely, equity REITs, mortgage REITs and hybrid REITs. Equity REITs are the most popular category, where the trust owns the income-producing real estate. Mortgage REITs function on borrowed capital and hybrid REITs are typically a mix of equity and mortgage REITs. However, InvITs are not regulated distinctly by the SEC.

With the introduction of the REITs in 2007, the United Kingdom has seen a number of newly-formed REITs undertaking initial public offerings. Under the UK regime, all REITs must be listed on a recognised stock exchange. However, under the REIT Regulations in India, REITs may be listed unless de-listed (which has been recognised under regulation 17). This has sought to boost both, private placement and public investments, in the real estate sector.

REIT and InvIT policies in India

In a move to encourage investments in REITs and InvITs, the capital markets regulator, Securities and Exchange Board of India (SEBI) has amended the SEBI (Real Estate Investment Trusts) Regulations 2014 (REIT Regulations) and the SEBI (Infrastructure Investment Trusts) Regulations 2014 (InvIT Regulations). The introduction of the amendments are in line with the government’s broader scheme of reforms, to revamp the real estate sector and enhance affordable housing. Following the slump in the real estate sector, reforms such as the enactment of the Real Estate (Regulation and Development) Act (RERA), Benami Transactions Prohibitions Act and the recent amendments to the REITs and InvITs Regulations, have sought to not only boost projects in this sector but also enhance transparency and organised ownership in residential and commercial real estate projects. Investments via REITs and InvITs may also lower the costs associated with raising of capital, a welcome move in the real estate sector, which has been struggling with rising costs of financing.

The amendments to REIT and InvIT Regulations, have expanded the borrowing options for REITs and InvITs, by allowing them to issue debt securities. Further, with respect to REITs, the minimum holding norms have been relaxed and on-lending to their underlying holding companies or special purpose vehicles (SPVs), have been allowed. Earlier, they were allowed only for InvITs. Apart from these changes, the holding period of compulsory convertible securities in holding companies and/or SPVs (against which such units have been received) shall be considered for the purpose of calculation of one year, for units to be offered to the public, in case of an initial public offer by REITs or InvITs. Earlier, this benefit was available only for equity shares or partnership interest in a LLP.

Will the various policy changes boost real estate investment?

Investments in the real estate sector have been restricted and regulated (for example, end-use restrictions have been imposed, on utilisation of FPI securities in real estate business). Issuances by the REITs and InvITS have been staggered, since the SEBI issued notifications on the norms for fund raising in 2014. While such trust structures are widely popular in the European and American markets, it has had lukewarm growth in Indian markets. It is expected that the new norms introduced by the SEBI, could facilitate growth and boost the popularity of such trust structures in India.

Further, by allowing REITs and InvITs to issue debt securities, expanding the investor base (by way of introduction of the definition of ‘strategic investors’), allowing on-lending to SPVs and holding companies, such trust structures shall become preferred avenues for investment into the real estate sector. It is expected that these amendments shall facilitate the listing of such REITs and InvITs on the stock exchanges, thereby, enhancing liquidity and allowing potential investors to invest in real estate, while at the same time investing in publicly-traded securities.

SEBI’s amendments, which have sought to further liberalise the REITs’ and InvITs’ frameworks, could boost and facilitate the growth of such trust structures and also pave way for more advanced structures, as seen in the US and the UK.

(Manisha Shroff is a partner and Meenakshi Kurpad is an associate at Khaitan & Co)

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