Presentation on REIT (Real Estate Investment Trusts)

Introduction & Concept REITs were created in the United States in the yr 1960 by

Congress in order to give all investors the opportunity to invest in large scale diversified portfolios of income – producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities.

Since then, more than 30 countries around the world have established REIT regimes, with more countries in the works. A comprehensive index for the REIT and global listed property market is the FTSE EPRA/NAREIT Global Real Estate Index Series, which was created jointly in October 2001 by respective indices.

Concept of REITs A real estate investment trust (REIT) is a company that

owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from offices, apartments and buildings to warehouses, hospitals, shopping centers, hotels and timberlands.

REITs were designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks. REITs are strong income vehicles because, to legally avoid paying U.S. Federal income tax, REITs generally must pay out at least 90 percent of their taxable income in the form of dividends to shareholders. So it is relatively less risky also.

Types of REITs Equity:- Equity REITs invest in and own properties.

Their revenues come principally from their properties rents.

Mortgage:- Mortgage REITs deal in investment and ownership of property mortgage. Their revenue are generated primarily by the interest that they earn on mortgage loan.

Hybrid:- Equity + Mortgage.

UPREIT and DOWNREIT UPREIT:- It is kind of exchange as a way to defer or

completely avoid capital gain tax liability when an individual or company wants to sell appreciated real estate.

DOWNREIT:- A joint venture between a real estate owner and REIT that assists the real estate owner in deferring capital gain tax on the sale of appreciated real estate.

Legal Requirements (USA)

Assets 75% of assets must be real estate, cash, and

govt. securities▪ other REIT shares are considered real estate assets

not more than 5% of assets can be from 1 issuer if not covered under above test

may not have more than 10% of voting securities of 1 issuer if not covered under 1st test

At Least 75 percent of the value of REITs must consist of real estate assets, cash and Government securities

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Legal Requirements (USA) Income

95% of gross income must be from dividends, interest, rents, or gains from sale of certain assets (real estate, cash, or govt securities).

75% of gross income must be derived from rents, interest on mortgages, gains from sale of certain assets, or income from other REITs

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Legal Requirements (USA) Income

No more than 30% of gross income can be derived from▪ sale or disposition of securities held less than

6 months ▪ sale or disposition of real estate held for less

than 4 years, except those involving foreclosures.▪ properties held for sale in the normal course

of business (anti-dealer provision)

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Legal Requirements (USA)

Distribution must distribute 90% of all taxable income to

investors

Management REIT managers must be passive▪ REIT trustees, directors or employees may not

actively engage in managing or operating REIT properties (includes providing service and collecting rents from tenants).▪ Managers may set policy: rental terms, choose

tenants, sign leases, make decisions about properties.

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Advantages of REITs1. Higher Income - Ongoing dividend income as well as long-term

capital gains.2. Portfolio Diversification - Investors are able to diversify within the

real estate market by holding an interest in multiple properties.3. Liquidity - REIT shares are traded on the major stock exchanges.4. Professional management - Managed by highly skilled and

experienced real estate professional managers.5. Income is secured by long leases - REIT leads to a secure and

stable income stream over a longer period.6. It Goes up - Other investments tend to fluctuate; whereas real

estate, usually becomes more and more valuable.

Disadvantages of REITs1. Grow at a slower pace - Only 10% of income can be

reinvested back into the business.2. Tax treatment - REIT dividends are not treated under

the tax-friendly.3. Investment risk4. May rely on debt - A higher dividend pay-out may force

management to go for higher leverage to expand real estate holdings.

5. Some REITs will incur high management and transaction fees, leading to lower pay-outs for shareholders.

REIT – The Indian Story

Purpose of REIT

Provides an organised market for retail investors to invest and be part of the Indian real estate growth story

Provides a professionally managed ecosystem that is risk averse and is aimed at protecting the interest of public

Provides an exit platform from the real estate sector to ease out liquidity burden

Commercial Aspects

Corporate Governance Operational Transparency Liquidity

Legal Aspects REIT shall be a Trust set up under the Indian Trust

Act, 1882 and registered under the SEBI (Real Estate Investment Trusts) Regulations 2014.

IPO, FPO, Right issue, QIP Minimum asset size - Rs 500 crore, Minimum offer size for initial offer - Rs 250 crore. Minimum 200 subscribers required for REIT

Tax Aspects

REITs and Subprime Crisis REITs were believed to be very similar to utility stock.

However, the subprime crisis - which had its roots in the U.S housing market – had raised some doubts regarding this comparison.

Several researches have been carried out to re-examine the relationship between REITs and utility stocks analyzing data from the United States.

One of the research, conducted in the year 2009 empirically suggested that REITs became more riskier as compared to utility stocks.

Reasons Underestimated Risks in the U.S. housing and mortgage

market. Macroeconomic imbalances in the U.S.-centric global

economy combined with a sustained decrease of U.S. interest rates at the beginning induced a housing boom in the U.S.

Rapid and careless expansion of mortgage lending with an unusually low compensation for risk-taking

Lending decisions were taken under the faulty assumption of ever rising real estate prices.