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REIT regulations
January, 03rd 2008

SEBI wants common investors to be exposed to REIT first which, in any case, would be much safer, given its focus on rent-yielding properties. In due course, REMF can also be made available to the common investors.

S. Murlidharan

Real Estate Investment Trusts (REIT), the new kids on the block, will take off once the draft regulations issued by the Securities and Exchange Board of India (SEBI) in this regard are put on the statute. They are conceptually different from Real Estate Mutual Funds (REMF).

REIT invest funds in rent-yielding properties and REMF in an array of avenues, of course, all linked to real estate, such as shares and debentures of real-estate companies, properties under construction, and so on.

A REIT is proscribed by the draft regulations from investing in incomplete properties beyond 20 per cent of its corpus.

Alternative source of finance

In the event, contrary to the popular perception, it is not REIT but REMF that would position itself as an alternative source of finance to the realty sector. That role simply cannot be performed by a REIT given the fact that it can invest only in completed properties generally.

SEBI wants to keep REITs away from financing properties that are under way beyond 20 per cent of the funds mobilised by a scheme.

Units of REIT can be likened to fixed-income schemes of mutual funds and those of REMF to growth and equity funds.

SEBI obviously is treading cautiously. It wants common investors to be exposed to REIT first which, in any case, would be much safer, given its focus on rent-yielding properties.

In due course, REMF may also be made available to common investors. As it is, the HDFC Property Fund and similar other mutual fund schemes are available only to high net worth investors.

For example, HDFCs scheme requires a minimum investment of Rs 5 crore by a subscriber. The draft regulations on REIT require a scheme to be rated by a credit rating agency, approved by an accredited appraising agency and valued by a registered valuer.

One wonders whether the credit rating agency has any role at all in the scheme of things. Be that as it may.

The schemes will be close-ended and, hence, open for subscription only for a limited period 90 days as per the draft regulations.

Thereafter, entry and exit is possible only through stock exchanges, where these units have to be mandatorily listed.

Features of REIT

Shutting out open-ended schemes for REIT is logical given the peculiarities of its investments real estate.

In an open-ended scheme, the flurry of day-to-day entries and exits would necessarily call for computation and publication of Net Assets Value (NAV) daily, which is not possible with a REIT, given that unlike in the case of shares for which daily quotations are available, it would simply not be possible to call upon the valuer to do valuations afresh every day.

More important, a REIT simply cannot stand redemption pressures, so common with open-ended schemes, given that its investments are locked in immovable properties and that the rental income by itself would often not be enough to handle such pressures.

The draft regulation is not very explicit about furnishing of NAVs by a REIT on account of the fact that even for a close-ended fund, NAV is the cornerstone for market valuations.

The draft regulations have implicitly put the issue of taxation in the CBDTs court.

As it is, approved mutual funds are exempt from tax, and dividends received from equity-based schemes are tax-free in the hands of the unit-holders as well, with the fund having to pay dividend distribution tax, of course.

The other arm of the government should speak out. The issue is obviously out of bounds for SEBI. Hence, the silence on this issue in its draft regulations.

(The author is a Delhi-based chartered accountant.)
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