How SEBI's Notification for SM REITs Can Benefit Investors

The notification is expected to be a game changer for retail investors and High Net worth Individuals (HNIs) enabling them to have exposure to real estate the smart way, as a financial asset, instead of owning a residential property and/or commercial property in a physical form.

What Is a REIT?

REIT, as characterised by the regulator, means the pooling of funds to issue units to at least 200 investors so as to acquire and manage real estate asset(s) or property(ies) that would entitle such investors to receive the income generated therefrom without giving them the day-to-day control over the management and operation of such real estate asset(s) or property(ies).

The regulatory guidelines make it mandatory for REITs to pool Rs 50 crore or more to issue REIT units.

The ownership of these is structured by way of one or more schemes, having a distinctive mandate and operating as Special Purpose Vehicles (SPVs).

So, just as you can have exposure to various underlying stocks and other securities by investing in a respective mutual fund scheme, there are REITs, which now as per the new notification, also include SM REITs.

The investment manager of a REIT (just as you have a fund manager in the case of mutual funds) identifies the real estate assets or properties it proposes to acquire or provides the features of the real estate assets or properties, including the location or such other details by following due legal process, depending on the mandate of the REIT and its size.

In the case of SM REITs, at least 95% of its assets must in fully developed and revenue-generating assets, as against the 80% requirement for larger REITs investing in rent-generating assets and under-construction projects as well.

The minimum price of each unit of the scheme of the SM REIT is Rs 10 lakh or such other amount as may be specified by the Board of the REIT from time to time.

The regulatory guidelines make it binding that, no offer of units by a scheme of SM REIT is made unless:

• - The size of the asset proposed to be acquired in a scheme of the SM REIT is at least Rs 50 crore and less than Rs 500 crore, and

• - The minimum number of unitholders of the scheme of the SM REIT other than the investment manager, its related parties and associates of the SM REIT are not less than 200 investors.

Further, according to the regulations, no single investor can own more than 25% of the REIT scheme.

The new regulations also make it mandatory for investment managers to have a personal net worth of at least Rs 20 crore, of which Rs 10 crore should have a positive liquid net worth.

Also, the regulation states that at least two key management personnel should have a minimum of five years of experience in real estate and real estate fund management.

How REITs Would Benefit Investors?

REITs are financial assets that allow you to have exposure to real estate, both residential and commercial, -- by way of fractional ownership -- instead of investing in real estate in a physical brick-and-mortar form and making a high-ticket investment. Simply put, you co-own real estate with other unitholders, and what you potentially benefit from is rentals plus capital appreciation of the underlying assets of the REIT.

Further, REITs are listed on the stock exchange. The units of REITs traded on exchanges provide you, the investor, with an option to exit, provided there are buyers available. Thus, there is better liquidity compared to owning physical property (which could take months to sell or dispose it).

With strong regulations in place, as an investor, you have investor protection, fairness, standardisation, and transparency (with disclosure norms in place).

The gazetted notification of SEBI's regulation for REITs has formalised REITs and may garner the interest of investors, particularly the risk-taking retail investors and High Net worth Individuals (HNIs). They will now have another avenue to diversify their financial investments in the endeavour to earn better returns (than investing physically in a property).

According to the regulator, as the comfort level builds, the minimum investment required by SM REITs may also come down.

Moreover, we may also see more REITs listed on the stock exchange.

That being said, invest sensibly by paying attention to your risk appetite, liquidity needs, broader investment objective, the financial goal/s you are addressing, the investment horizon, and do not ignore the tax implications.

How Are Units of REITs Taxed?

The rental yields and/or interest earned from the investment in REIT units are taxed as per your tax slab. Similarly, if the SPV of the REIT has opted for a lower tax regime. As regards, the realised capital gains made out of the investment, it will be taxed as Short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG), as the case may be.

Be a thoughtful investor.

Happy Investing!

Note: This write-up is for information purposes and does not constitute any kind of investment advice or a recommendation.

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.