Real Estate Investment Trust (REIT)

  • November 19, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Real Estate Investment Trust (REIT)

Subject: Economy

Context:

Nexus Select Trust has filed the Draft Red Herring Prospectus (DRHP) with the SEBI for India’s first retail REIT public issue in the first half of 2023.

Details:

  • At present, there are three listed REITs — Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust — on Indian stock exchanges but all these are of leased office assets.
  • Nexus Select Trust will be the first REIT with rent-yielding retail real estate assets.

What Is a Real Estate Investment Trust (REIT)?

  • REITs or Real Estate Investment Trusts (REITs) are funds that invest their corpus in income producing commercial and industrial properties.
  • REITs are similar to Mutual Funds which allow multiple investors to pool their investments and assets are professionally managed by a designated Manager.
  • The underlying asset in the case of REITs is primarily Real Estate Holdings or loans secured by Real Estate.

Structure:

  • When a Real Estate Company decides to form a Real Estate Investment Trust, it becomes the Sponsor for the REIT and appoints a Trustee.
  • The Trustee holds the Real Estate Assets of the Trust in its Trusteeship and these assets are no longer directly controlled by the Sponsor.
  • Trustee appoints a Manager to manage the Real Estate Assets on behalf of the Trust and also make investment decisions.
  • The REIT then registered and  raises money through the sale of units either publicly on stock markets or through private investors.
    • An investor can purchase even one share of REITs at their listed price and can sell on the exchange at the prevalent market price.
    • An investor earns income in the form of interest, dividends, amortisation of SPV and capital gains.

  • REIT investment represents ownership of the Real Estate Assets held by the Trust and this entitles the unit holder to a share of the income generated by the REIT.
  • Different Types of REITs
    • Retail REITs: These REITs are required to invest at least 24% of their assets into commercial retail such as shopping malls and freestanding retail stores.
    • Residential REITs: These are Real Estate Investment Trusts that own and operate manufactured housing as well as rental apartment buildings.
    • Healthcare REITs: As suggested by the name, these trusts primarily invest in and operate healthcare-focused Real Estates such as hospitals, nursing facilities, retirement homes, and medical centers.
    • Office REITs: These primarily invest in and operate office space. Their main source of income for this type of REIT is thus rental received from tenants with long-term leases.
    • Mortgage REITs: In the case of these REITs, an estimated 10% of investments are made into mortgages instead of physical Real Estate.
  • There are other three types of REIT available: equity REITs which purchase, own and manage income-generating properties; mortgage REITs which lend money directly or indirectly to real estate owners; and hybrid REITs which are a combination of the first two.
  • In India, the current SEBI guidelines related to REITs in India were approved in September 2014.
    • At least 80% of investments made by a REIT need to be in commercial properties that can be rented out to generate income. The remaining assets of the trust (up to the 20% limit) can be held in the form of stocks, bonds, cash, or under-construction commercial property.
    • At least 90% of the rental income earned by the REIT has to be distributed to its unitholders as dividends or interest.
    • Stock market listing of REIT is mandatory
economy Real Estate Investment Trust (REIT)