Kashish Khattar is a 4th-year student at Amity Law School, Delhi. This article is a discussion revolving around the structure and types of REITs and InvITs in India.

Introduction

Real Estate Investment Trusts (“REITs”) are very similar to mutual funds and they basically facilitate investments into real estate sector where the people are buying units rather properties and profiting from their investment for the same. This is mainly for people who are not looking to buy properties but only looking to invest in the property market. REITs are governed by the Securities and Exchange Board of India (“SEBI”) (Real Estate Investment Trusts) Regulations, 2014. These regulations provide a framework for registration and regulation of REITs in the country. The government and the regulators have been making big leaps to help wide implementation of the REITs. Finance Ministry’s decision in 2016 decided to remove the DDT clause. In Dec 2017, SEBI also allowed the REITs to invest 50% of its funds in holding companies.

Much like the REITs are the InvITs which can be described somewhat similar to REITs, where people pool in small sums of money in a similar fashion like in a mutual fund. The InvITs were introduced to enable investment in the infrastructure sector. SEBI notified the Infrastructure Investment Trusts Regulations in 2014 for the registration and regulation of InvITs in India. InvITs can be said to be a modified version of REITs which are designed to suit the specific circumstances in India.

REITs

REITs as defined, are to be used for investments in real estate. Real estate mainly refers to land and any permanently attached improvements to it, whether on leasehold or freehold and includes buildings, sheds, garages, fences, fittings, fixtures, warehouses, car parks, etc. and any other assets incidental to the ownership of real estate. But the definition does not include mortgage and any asset falling under the purview of ‘infrastructure’. This definition comes through a Notification of Ministry of Finance dated 7th October 2013.

A REIT in India is mainly allowed to invest in completed and revenue generating assets and other approved investments. Also, REIT has to distribute the majority of the income they produce among the unitholders. REITs can mainly invest in commercial real estate through two ways – (i) directly; and (ii) through a Special Purpose Vehicle (“SPV”) which has to invest more than 80% of their assets in properties. During an IPO, the minimum investment has to be Rs. 2 Lakhs. In the case of primary markets, REITs can be traded with an investment cap of Rs. 1 Lakh.

If the REIT is being done through an SPV, REIT must have a controlling interest with 50% of the equity share capital or the interest in the SPV. REIT needs to be registered through an initial public offering (“IPO”). REIT units will be listed with an exchange and then traded as a security. REIT shares some really diversified and safe investment opportunities to the public with an added advantage of reduced risks under a capable management to ensure the best returns on investments.

Types of REITs in India

1. Equity REITs – Equity REITs basically make money by the owner giving spaces like shopping malls, large office spaces, massive residential townships to tenants on the lease. The income earned is then divided among the REITs investors in the form of dividends.
2. Mortgage REITs – Here, there is no concept of an owner. There are only finances that are taken against the debt which is taken for the development of the real estate projects. Basically, Mortgage REITs earn income in the form of EMI’s which are then distributed among the REITs investors as dividends.

Structure of REITs

1. REITs can be set up as trusts under the Indian Trusts Act, 1882 and are registered with SEBI. Similar to a mutual fund, it has three parties:
2. Trustee – who generally oversees the activities of the REITs and is supposed to be a registered debenture trustee who is in no way associated with the sponsor;
3. Sponsor – they hold at least 25% in the REITs for 3 years and 15% after that. Their main responsibility is to set up the REIT and appoint the trustee; and
4. Manager – who is a company or an LLP or a body corporate which manages and operates the REIT. A manager has to have at least 5 years of related experience along with other requirements as notified.

What can be the benefits of investing in REITs?

• (i) Income is secured by long leases;
• (ii) liquidity;
• (iii) professional management;
• (iv) transparency;
• (v) higher dividend; and
• (vi) portfolio diversification.

The advantages of investing in REITs can be understood in the following ways:

1. REITs mainly generate income in the form of rents. The rental income from the beginning of time is seen to be a very assured type of income.
2. The convenience of buying REITs shouldn’t be underrated. REITs can be bought like shares instead of the hassle of buying real estate and dealing with the various types of legalities that come connected with it.
3. We cannot forget about the yields generated by the REITs for its shareholders. On an average, REITs can yield close to 10% per annum returns for its shareholders.

1st REIT in India is being done by the Blackstone group through the local partner Embassy group, it is expected to raise about USD 1 billion. The REIT is expected to include properties from the Embassy group as well as properties of the Blackstone group.

InvITs

InvITs short for Infrastructure Investment Trusts. They are really similar to REITs funds. InvITs also pool in small sums of money from investors. The pooled money is then used as an investment in an Infrastructure project which will ensure smooth cash flow.

InvITs can basically invest in infrastructure projects, either directly or through an SPV. In the case of Public-Private Partnership, InvITs can only be done through SPVs. InvITs just like REITs is governed by SEBI through SEBI (Infrastructure Investment Trusts) Regulations, 2014. Which mainly provide for registration and regulation of InvITs. InvITs can be bought in an IPO for 10 years or more. The minimum amount of investment is Rs. 10 Lakh.

Types of InvITs

1. InvITs which  mainly invests in completed infrastructure projects, this type has to take make a public offer of its units; and
2. InvIT which actually has the elasticity to invest in the under construction projects, whereas this type has to go for a private placement of its units.

Structure of InvITs

They are typically set up as trusts and registered with SEBI. They mainly have 4 parties involved-  

(i) Trustee – Trustee has to be a SEBI registered debenture trustee;

(ii) Sponsor (one or more) – Sponsor is a promoter or a company or an LLP or a body corporate with a net worth of Rs. 100 crore who has set up the InvIT. It is an SPV in the case of a PPP project. They have to hold InvITs for a minimum of 3 years except as otherwise stated in any regulatory requirements notified.

(iii) Investment Manager – It is a company or an LLP or a body corporate which basically manages all the business activities surrounding the InvITs.

(iv) Project Manager – He is responsible for the execution of the project and in the case of PPP, it is the entity formed which has to take care of responsibilities surrounding the execution of the project.

Advantages

InvITs are a way of providing a suitable structure for the financing of infrastructure projects in the country. At a time where most of the major infrastructure projects under development in India are delayed and have varied reasons for being incomplete including debt finance costs, locked up equity of the private investors and many more. InvITs can come to the rescue and help in the following ways –

1. InvITs can provide for a longer term refinancing of existing infrastructure projects.
2. Help retrieve the developer’s capital so that it can be used for reinvestment into other new infrastructure projects.
3. InvITs can provide for taking out of existing high-cost debt with long-term low-cost capital and additionally help the banks from risky loan exposure.
4. InvITs can help in furthering infrastructure development in the country. Further, it will investors to have diversified investments in the infrastructure sector.
5. It will also help in attracting international finance in the infrastructure space.
6. It is also said to bring better standards of governance in the infrastructure space.

InvITs in India

1. GMR Infrastructure Investment Trust
2. IL&FS Transportation Investment Trust
3. India Grid Trust
4. IRB InvIT Fund
5. MEP Infrastructure Investment Trust
6. Reliance Infrastructure InvIT Fund

Conclusion

Several international institutional investors have shown a keen interest in the real estate market of the country. They are eyeing REITs and InvITs as a type of opportunity to take advantage of India’s growing growth in this sector. REITs and InvITs are a good idea for these institutional investors to diversify their investments in India. It is believed that strong REIT governance protocols made up by SEBI, along with laws such as RERA protecting the customers at large contribute to the transformation of the real estate investment space.

According to Lasalle Investment Managers, India’s real estate is now the world’s 13th largest real estate market by asset value and is worth more than USD 1 trillion. Only the time will tell as to how attractive will these investments be in the future.