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Real Estate Investment Trust (REIT)

 

What is Real Estate Investment Trust?

Real Estate Investment Trust is a mutual funds for Real Estate. Under mutual funds underlying assets are equity and debts, similarly REIT will have the real estate as its underlying assets fetching rental incomes.

How to Incorporate:

  1. Trust should be registered under Registration Act 1908.
  2. Trust deed has its main objective as undertaking activity of REIT.
  3. Trust deed should specify the responsibilities of the Trustee.

Application to Whom:

Applicant (Trust) sends application in Form A to SEBI for registration.

  1. Application fees is Rs.1,00,000/- (Non-refundable)
  2. After getting intimation from the SEBI further non-refundable fees Rs.10,00,000/- to be paid.

Parties to the REIT:

  1. Sponsors:
    a) Sponsor should be one person but not more than 3 persons and each of the sponsors holding or proposing to hold not less than 5% of the number of units of REIT post issue basis and
    b) Net worth on collective basis not less than 100 crores, provided each sponsor should has a net worth not less than 20 crores and
    c) Should have not less than 5 years of experience in development of real estate or fund management in real estate.
  1. Manager:
    a) The Manager of REIT may be body corporate, company or LLP.
    b) Should have 5 years of experience in fund management or advisory services or property management in real estate industry.
  1. Trustee:
    Trustee should registered with SEBI and not an associate of the sponsors or manager.

Note:

  • Sponsors, Manager and Trustee should be separate entity.

How REIT function?

REIT can directly invest in Income generating commercial property or Invest through SPV.

Special Purpose Vehicle (SPV):

  • LLP or company set up by REIT and having controlling interest not less than 50% of the equity share capital or interest.
  • SPV should hold at least 80% of wealth in properties not in other SPV.
  • SPV should not engage in any other activity other than developing or holding property.
 

Structure of REIT:

Structure of REIT in India

How REIT raise funds:

  1. REIT raise fund from any investors either in India or foreign.
  2. Investors has to invest at least Rs.2,00,000/- Minimum unit size should be Rs.1,00,000/- i.e. investors should hold at least two units.
  3. There should at least 200 investors for a REIT.

Conditions for REIT:

Not less than 75% revenue of REIT should be from rental income, leasing and letting of real estate assets, other than Capital gains on disposal of properties.

Income of REIT:

  1. Rental income from direct investment in real estate properties.
  2. Capital gain from sale of real estate properties.
  3. Dividend income from SPV.
  4. Interest income from loan advanced to SPV.

REIT Investment Condition:

Not more than 20% of REIT assets in

  1. Developmental properties (Property held by REIT not less than 3 years and leased out)
  2. Listed and unlisted debt of companies.
  3. Equity shares of company not less than 75% of its activities from real estate field.
  4. Government securities.

Not less than 80% of the Value of REIT assets should be invested in completed revenue generating properties.

Note:

The Investment by a REIT shall only be in SPVs or Properties or securities in India other than Vacant land or Agricultural land or mortgages.

Taxability in the Hands of REIT:

Under section 115 UA distributed income of REIT to be taxed in the hands of investors in the same nature as in hands of REIT.

  1. Interest income fully exempt under section 10(23FC).
  2. Long term capital gain taxable @ 20% short term gain @15%
  3. Other income taxable at 30%.
  4. Dividend received by REIT from SPV is exempt provided SPV should pay DDT.

Taxability in the hands of Investors:

  1. Interest Income received from REIT is fully taxable.
  2. Any Other income is fully exempt.

Initial Public offer condition:

  1. REIT registered under SEBI.
  2. Value of assets hold by REIT not less than 500 Crores.
  3. Units proposed to be offered to public not less than 25% of the total outstanding units of REIT and offered only by offer document.
  4. Offer size is not less than 250 crores.

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6. Franklin India TaxShield

7. DSP BlackRock Tax Saver Fund

8. Birla Sun Life Tax Relief 96

9. Reliance Tax Saver (ELSS) Fund

10. HDFC TaxSaver

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