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SEBI paves way for real estate investment trusts

29 Dec, 2007, The Economic Times, Mumbai.

The Securities and Exchange Board of India (SEBI) on Friday outlined a set of draft regulations for the functioning of real estate investment trusts (REITs), paving the way for implementation of this scheme in India early next year.

The draft includes various prerequisites for any entity to launch a REIT scheme, including the valuation aspect, which has been considered a key roadblock to the launch. The market regulator said every such scheme should appoint an independent property valuer, who will value all the real estate under the scheme after physical inspection.

One of the proposals is that the REIT should be in the form of a trust created under the Indian Trusts Act. Trustees should be either a scheduled bank, trust company of a scheduled bank, public financial institution, insurance company, or a body corporate. A scheme should be launched by a trust and be managed by a real estate investment management company, with both parties having to register with SEBI. Only close-ended schemes can be launched by the trusts, and these schemes have to be listed on the stock exchanges mentioned in the offer document.

“The valuation methodology shall follow the ‘valuation standards on properties’ published from time-to-time by the concerned Indian institute or the international valuation standards issued from time-to-time by the International Valuation Standards Committee,” the draft proposal said, while listing the requirements of the independent principal valuer.

On investment limitations, SEBI said a REIT, under all its schemes, should not have exposure to more than 15% of any single real estate project. While it can buy uncompleted units in a building, which is unoccupied and non-income producing or in the course of development, the aggregate contract value of such real estate should not exceed 20% of the total net asset value of the scheme at the time of acquisition, the market regulator said.

Further, it said REIT, under all its schemes, should have not exposure to more than 25% of all the real estate projects developed, marketed, or financed by the same group of companies. The scheme is prohibited from investing in vacant land or participating in property development activities. The market regulator has put some restrictions on the borrowing capabilities of a REIT scheme for funding investments and operating expenses.

Accordingly, a scheme cannot borrow more than one-fifth of the value of the scheme’s total gross assets. While the scheme can mortgage its assets for such borrowings, the REIT should disclose its borrowing policy in its offer document, including its maximum borrowing limit, the draft said.

The market regulator said the scheme shall distribute not less than 90% of its annual net profit after tax as dividends every year to unit- holders. “The real estate investment trust shall determine any revaluation surplus credited to income, or gains on disposal of real estate, which shall form part of net income for distribution to unit-holders,” the draft proposal said.


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