India Real Estate Investment Trusts - Analysis

Here is an analysis of the Draft Guidelines for Indian Real Estate Investment Trusts after studying various documents released by SEBI.

Guideliness will open a hitherto closed market, and provide developers/property market, another pool of money (IPO's, off-shore structures, and P/Es, were a rage in 2007).

• Structure - set-up under local laws; managed by a real estate investment management company
• Funds - close ended, listed on stock exchanges with valuations done by independent principal valuers disclosed annually
• Dividend distribution - not-less than 90% of post tax profits
  
• Issues - No clarity on taxation for REIT's or investors - this is key to the viability of these structures, and needs to be addressed.

The investment guidelines for REITs cover

• Non-income producing/under-development asset: Capped at 20%
  
• single Asset exposure: 15% cap
  
• Developer exposure/concentration: restricted at25% for projects developed/marketed/financed by a developer group
• Leverage: Capped at 20% of total gross assets
  
• Restrictions: Cannot invest in land/participate in development activities.

We see this as early signs of an evolving commercial asset sale market (office, IT Parks/SEZs, Hotels, Malls, Hospitals) in India; which could result in potential yield compression. Key beneficiaries should be developers with higher leverage towards such assets such as DLF and Unitech. Further, this should provide a new channel for financing projects and enhance levels of disclosures and transparency in the sector.