REITs & Special Purpose Vehicle (SPV)

India’s real estate industry has witnessed a paradigm shift from traditional finance to an era of structured finance, private equity and public offering. REITs have been in existence in developed economies since several years and provide a stable investment alternative for retail investors, as well as the real estate sector. Taking cue from developed economies, the Indian REIT regime echoes the internationally followed concepts, methods and principles.

Real estate investment trusts (REITs) is an investment vehicle that can be used to attract private investment in the infrastructure and real estate sectors, and also relieve the burden on formal banking institutions. Regulations governing REITs were introduced in India as recently as 2014.  REITs offer several advantages to people who do not have sufficient money to invest in real estate but desire to own property. Other than Unit Holders/Investors, the other primary players in REITs constitute the Trustee, Sponsors, Managers and Principal Valuer.

The India REIT regime is aimed at providing:

  • an organized market for retail investors to invest and be part of the Indian real estate growth story
  • a professionally managed ecosystem that is risk averse and is aimed at protecting the interest of public
  • an exit platform for the real estate sector to ease out liquidity burden

Investments through a Special Purpose Vehicle (SPV)

REITS may invest either directly or through a SPV. Where the investment is through a SPV, it is required to hold controlling interest and not less than 50% equity in such SPV. Also, the SPV is required to hold 80% equity in the REIT assets. It is to be noted that multi layer SPV structure may not be permitted and multiple schemes under REIT are not permitted.

REITs Key Advantages

REITs will help to finance, develop and manage infrastructure that drives growth and productivity in a developing country like India. In addition, they can facilitate the process of setting up large-scale housing for ordinary citizens, key workers and the disadvantaged. In short, these securitization vehicles can help to build enhanced communities that will enrich hundreds of millions of lives across the sub-continent.

India’s REITs can also help to bolster smart urbanization, underpinned by economic and social infrastructure. They can capitalize roads, vital community utilities, data centers, logistic facilities and transport systems, to name a few. Furthermore, they are efficient platforms for implementation of social infrastructure, including childcare, senior citizen care, health facilities and students’ accommodation.

In India, in the absence of a regulator for the real estate sector, introduction of REITs is a welcome move that promises to bring in liquidity, transparency, better governance, organized platform for retail investment and an ecosystem, which is professionally managed and protects investors. Largely, the Indian REIT regime is at par with the international REIT format and seems to have what is needed to provide the right impetus to the Indian real estate sector.

Although a lot has been done liberalize investments in REITs, further taxation and regulatory incentives are required to make REITs a real success in India and attract the desired investors. In light of the above, it is imperative for the Government to fast track taxation and other regulatory amendments and reforms to promote REITS in India in order for it to have the desired effect on the economy.

The market for REITs is relatively nascent in India. However, with various enabling factors such as the growth of the economy and the middle class, and a concomitant need for housing and infrastructure, we are positive that the market for these investment vehicles will witness considerable growth in the near future.

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