REITs to get regulator’s nod

New Delhi (PTI): Seeking to attract real estate investors to the capital market, Sebi has revived an over five-year old proposal to allow listing and trading of REITs (Real Estate Investment Trusts) as an investment product. The move is aimed at allowing investors to buy and sell units of REITs and providing them an investment vehicle for the real estate sector, similar to mutual fund and Exchange Traded Fund structures for stocks, bonds and other securities, a senior official said.

However, Sebi is initially considering restricting the investments in REITs to only foreign funds, domestic institutional investors and HNIs given the higher level of risks associated with the real estate sector, the official said, adding that small retail investors could be allowed at a later stage.

The move is likely to help channelise investor interest towards REITs, while leaving the physical real estate market (comprising of housing units and office spaces) for the end users -- thus helping the market reach a pricing level based on real demand and supply metrics.

As per the proposal being considered, REITs can issue units of their investment schemes through a public offer and list them thereafter on a stock exchange in a way similar to the issuance and listing of shares during an IPO. Thereafter, the units can be traded on the stock exchange platform just like shares. The money collected by the REIT through the public offer can be used for development of real estate projects as per its stated objective disclosed in the offer document.

Also, the scheme would need to be terminated after sale of the project developed with investors' money, and the proceeds would need to be distributed proportionately to the unit holders. However, REITs may have much tougher rules on various fronts such as appointment of independent valuation agencies, transactions with related entities, maintenance of accounts, auditors' role and mandatory disclosures, given a higher level of risk associated with such investments.

Besides, Sebi would also impose strict penalties in cases of default and subject the REITs to much stricter surveillance and inspection process to safeguard the investors' interest. Sebi, in early 2008, had proposed exhaustive 64-page draft guidelines for REITs and sought public comments on the same at that time.

Pursuant to a large number of real estate companies coming out with IPOs at that time, it was felt that vibrancy in sectors like IT and robust business expansion plans of companies was fuelling significant growth in the residential and commercial realty markets.

Recognising the crucial role they can play, Sebi had proposed to develop REITs as a preferred investment vehicle for the companies to raise "stable, global and more competitively priced capital", as also to provide investors with a transparent product for taking exposure to the realty sector. Globally, REITs have long been a preferred public property investment vehicle and they are known to have helped stabilise the capital access and reduce the capital costs.

However, a subsequent slowdown in the real estate sector, as also in the overall capital markets, led to the proposed REIT structure biting the dust. Sebi at that time was also encouraged by the fact that many Indian real estate companies were looking at markets like Singapore, which allows listing of REITs, to raise funds through this route.