1. 1
Development of Real Estate Investment Trusts in India
India’s Real Estate Sector
India’s real estate sector has traditionally been unorganized and fragmented, which has resulted
in it being perceived and identified as lacking transparency with weak systems, processes and
favoring the developers rather than the buyers. Nevertheless, the real estate sector has grown
exponentially in the last decade to close to US$ 57 billion from US$ 12 billion in 2005i
due to
healthy economic growth, an emerging middle class driving demand through increased
consumerism and higher disposal income. These factors will continue to drive the growth of the
real estate sector and it is estimated that the market will increase to US$ 105 billion in 2015-16ii
.
Foreign capital has also become attracted to the India real estate sector and at the same time
expects transparent and liquid ways to invest in the market. During the financial year 2011,
foreign venture capital investment in real estate was US$ 600 million, an increase of more than
two times from US$ 250 million in financial year 2007iii
.
Even the government is working towards establishing a Real Estate Regulatory Authority. The
government has released a draft real estate regulations bill, 2011 which primarily seeks to
increase transparency, increase accountability of the builder and provide a redressal mechanism
for the buyers particularly individual home buyers.
The real estate sector has evolved well with developers focusing considerably on project
planning, size, technology, output quality and financial management. Even access to organized
financing has increased through primary and secondary markets, financial institutions, and
alternative financing routes such as private equity. REIT is one such form of secondary market
financing which has been successful globally but is non-existent in India.
Introduction to REITs
REITs are a common pool of funds raised from institutional, high net worth and retail investors,
which acquire regular income-generating commercial real estate. The structure allows investors
to participate in ownership, management and development of real estate assets. REITs act as a
tax efficient tool as tax is payable either by the trust or by the investors for the income received
thereby avoiding double taxation.
The structure of a REIT is similar to that of a mutual fund with the existence of a Trustee, Asset
Management Company (REIT Manager), Assets (Properties), Property Manager and Unitholders.
Sponsor and Lenders may or may not exist.

2. 2
A Typical REIT Structure
Benefits of REITs
REITs are essentially income stocks which invest in mature income producing commercial
properties with requirements of distributing major share of the income to its unit holders.
1. Income distribution – Distribution of at least 90% of its distributable profits to the unit
holders making a regular income yielding asset for investors
2. Alternative asset for investors – Exposure for retail investors to real estate with low capital
requirements
3. Liquidity – If a REIT is listed it will result in the creation of healthy secondary market and
increase liquidity
4. Professional asset management – The structure of a REIT results in increased accountability
due to professional asset managers and disclosure obligations on the part of the developer
5. Alternative financing for developers – Provides an alternative route for equity financing for
developers and provides an opportunity to reduce leverage
6. Ownership of immovable property – By investing and owning immovable property default
risk is partially reduced
7. Restricted from entering into development – Most countries do not permit REITs to get into
development of land, which is riskier when compared to constructed property
REIT
Lenders Unit Holders Sponsor
TrusteeREIT Manager
Debt
Principal
and
Interest
Tax exempt
distributions
Units
Units
Tax exempt
distributions
Fees
Asset
Management
Fees
Trustee
Services
Properties
Ownership Net Property
Income
Property Mgr
Sub-
Contract
Property
Management
Services

3. 3
Real Estate Funds in India
At present in India, investors (high net worth, institutional) have the ability to invest in private
equity real estate funds. Private equity real estate funds are regulated and are to be registered
with SEBI. A drawback of this route of investment is that the minimum investment in such funds
is INR 5 lakh resulting in retail investors being unable to participate. To add to further woes of
the retail investors, such funds will now be regulated under the new Alternative Investment
Fund (AIF) regulations, which mandate a minimum investment of INR 1 crore from each investor
in a private equity real estate fund. Currently, there are 21 SEBI registered private equity funds
with Kotak Mahindra Realty Fund, HDFC Property Fund, INDIAREIT Fund, CIG Realty Fund, Red
Fort India Realty Fund being the large funds. ASK Property Investment Advisors has recently
raised an INR 1,000 crore Real Estate Fund; however, this fund is an offshore fund which is
registered in Singapore.
Private Equity Investments in Real Estate
Source: Venture Intelligence
Real Estate Mutual Fund Schemes
SEBI introduced guidelines for Real Estate Mutual Fund Schemes (REMFs) in April 2008,
however, no REMFs has been launched till date due to lack of clarity about the regulations. One
drawback of the regulations is that it does not allow investing in a real estate asset which is not
free from all encumbrances. Other major concerns include the calculation of the net asset value
of the scheme on a daily basis, when up to 25% of the scheme's corpus can be invested in
unlisted companies. Also, with respect to taxation of these schemes, confusion exists whether
these entities are to be taxed as a debt fund or an equity fund.
532
3,000
2,250
675
1,582
2,679
0
1,000
2,000
3,000
4,000
2006 2007 2008 2009 2010 2011
Amt. in INR millionAmt. in INR million

4. 4
Comparison of REIT framework across developed economies and India
Singapore United Kingdom United States India*
Organization rules 1. The REIT manager of
a listed REIT should
be a corporation
with a physical office
in Singapore and
have minimum
shareholders’ funds
of SGD$1 million
2. REITs must comply
with the listing rules
(i.e., at least 25% of
the units issued
should be held by at
least 500 public
shareholders) to be
listed on the
Singapore Exchange
1. A REIT must be
a closed-ended
corporation and
listed on a
recognized
stock exchange
2. A REIT must
have only one
class of ordinary
share
1. A REIT must have
at least 100
shareholders
2. The REIT may not
be a financial
institution or an
insurance
company
3. The REIT must be
otherwise taxable
as a domestic
corporation
1. Minimum assets
under
management
(AUM) of INR 20
crore
2. Limitation of not
more than 1,000
investors
3. Minimum
investment from
each investor INR
1 crore
4. Sponsor to
contribute 2.5% of
the total AUM
5. Minimum tenure
of three years
Income and asset
rules
1. The REIT’s income
must be derived
from qualifying
investments
2. The REIT must have
at least 75% of its
property invested in
income-producing
real estate (inside or
outside Singapore)
1. At least 75% of
income must be
derived from
qualifying
property
investment
activities to
maintain its tax-
exempt status
2. Rents must be
derived from at
least three
properties, with
no one property
representing
more than 40%
of the total
value of the
properties
involved in the
rental business
1. At least 75% of
the REIT’s gross
income annually
(excluding
prohibited
income) must
come from real
estate-related
Sources
2. At least 95% of
the REIT’s gross
income annually
(excluding
prohibited
income) must
come from real
estate-related
sources plus
passive sources,
such as dividends
and interest
1. Investment of not
more than 25% of
AUM in one
investee company
2. Investment in only
unlisted entities
3. Lock-in period of
one year for an
investment

5. 5
Distribution rules 1. At least 90% of
income in relation to
Singapore assets
must be distributed
annually
2. REIT taxable income
not distributed is
taxed at the
corporate tax rate
At least 90% of
income from
qualifying activities
must be distributed
within one year
from end of
accounting period
1. At least 90% of
REIT taxable
income must be
distributed
annually
2. The REIT is subject
to corporate tax
on amounts
retained and not
distributed
1. Income taxable on
the basis of
corporate tax rate
2. Distribution is
taxed on the basis
of existing
dividend
distribution tax
Gearing
restrictions
The REIT’s maximum
leverage is generally 35%
of property. Leverage
may exceed 35% (but
capped to 60%) provided
the REIT discloses its
credit rating from a
major rating agency
1. The UK-REIT
may not be
party to a loan
relationship
which provides
a return of
interest which is
linked to the
results of the
UK-REIT
2. Convertible
loans can be
issued by the
UK-REIT,
provided that
conversion is
into the single
class of shares
of the UK-REIT
There are no
restrictions on REITs
No leverage is
permitted. Borrowing
permitted only for
day-to-day operational
requirements
1. Source: Ernst & Young Global Real Estate Investment Trust Report 2010 – “Against All Odds”
2. *Real estate funds are regulated by SEBI (Alternative Investment Funds) Regulations, 2012

6. 6
Key regulatory issues to be addressed for REITs in India
The new AIF regulations by SEBI will include the existing private equity funds that invest in real
estate; however, the first step SEBI should take is to formalize the SEBI Draft REIT Regulations,
2008. It is essential to have a formal regulatory framework for REITs to grow in India.
1. Tax laws should be amended to provide for a basis of taxation of REITs as well as unit
holders. Ideally, REITs should be pass-through for tax purposes over and above the property
income. Mature REIT markets such as Singapore, U.K. and U.S. have pass through tax rules.
2. No capital gains tax (tenure of three years or higher) for investments in properties by REITs.
3. As stamp duty and registration charges accumulate to 5% to 15% of the value of the asset,
partial or complete exclusion from stamp duty on real estate transactions by REITs should
considered as it will aide in reduction acquisition costs for REITs and eventually increase
returns for the unit holders.
4. Eligible real estate assets should be clearly defined to avoid ambiguity:
a. Type of assets – can be defined for e.g. as retail and commercial
b. Occupancy levels – minimum occupancy levels can be specified at 70%
c. Status of completion should be an integral part of the guidelines
5. Asset enhancements can be aided by clear classification of REITs. Varied asset classes have
varied income streams and challenges. Hence, a particular REIT should be restricted to a
specific asset category viz. Retail or Commercial. This means that investments by a Retail
REIT shall be restricted to Retail Assets while a Commercial REIT may invest only in
Commercial Assets.
6. Among the various classes of Real Estate, the one which is most needed in India today is
Affordable Housing. Affordable housing is developed and sold by the Developer to individual
home owners. This asset class, partly due to the prevailing tenancy laws, is not held by Real
Estate Developers for giving out on Rent. REITs should be encouraged to invest in such
affordable housing properties so as to enable the growth of mass housing over a longer
period of time.
7. Minimum investment from an investor should be low to attract knowledgeable retail
investors and ensure broader investor base. The number of investors should not be
restricted.
8. Definition for efficiency is required as some real estate assets are sold at lower efficiencies,
while others have a higher efficiency.
9. 90% of net property income should be mandatorily distributed to unit holders each year.
10. REITs should be permitted to leverage and enhance the efficiency of the capital employed.
As the market for REITs develops, external commercial borrowing should be permitted.
11. Relevant provisions of building regulations should be amended to facilitate enhanced asset
efficiencies and the quality post acquisition.

7. 7
Business Trust as an alternative
REITs invest in commercial properties which enable the REIT to provide regular income to the
unit holders; however, this may hamper the growth of residential properties. Even globally, the
regulation of REITs requires that the investment be made in regular income generating real
estate assets. An alternative to the restriction is the creation of a Business Trust.
Business trusts are similar to REITs except for no regulatory defined limitation on borrowing and
the trust can invest in assets other than only commercial real estate. By pooling of various other
assets the business trust provides an opportunity to increase the returns for the unit holder.
REITs and Business Trusts in Singapore
Singapore has a significant number of listed REITs and business trusts. Trusts have invested in
retail assets, commercial assets, industrial assets, hospital assets and hospitality assets also.
Examples of listed trusts in Singapore:
Parkway Life REIT First REIT Ascendas India Trust
1 Type of Trust Real estate investment trust
Real estate investment
trust
Business Trust
2 Assets
Hospitals, medical center,
nursing homes,
pharmaceutical product
distributing and
manufacturing facility
Hospitals, nursing
homes, cancer center
and country club
Information Technology
Parks
3 Assets owned in
Singapore, Japan and
Malaysia
Indonesia, Singapore
and South Korea
India
4 Yield – FY 12 4.8% 7.4% 7.6%
5 Portfolio Value S$ 1.3 billion S$ 340.9 million US$ 686 million

8. 8
Religare Health Trust: A recently listed business trust in Singapore
In October 2012, Fortis Healthcare sponsored a business trust to be listed in Singapore. Hospital
related assets of Fortis Healthcare form part of this business trust.
Structure of Religare Health Trust
Religare Health
Trust
Unit Holders
Fortis Healthcare
Limited (Sponsor)
Religare Health
Trust Trustee
Manager
Tax exempt
distributions
Units
Units
Tax exempt
distributions
Fees
Asset
Management &
Trustee Services
Hospitals & Clinical
Establishments in India
(Assets)
Ownership Net Property
Income
Fortis Operating
Companies
(Property Manager)
Property
Management
Services
Sub-contract

9. 9
Annexure I
FICCI Recommendations on Draft (Real Estate Investment Trusts) Regulations, 2008
1. The taxation on REITs income should be such that the income gets taxed only once till the stage of
its distribution to the end investor. In a Mutual fund if it is dividend, the fund pays the dividend
distribution tax and there is no tax in the hands of the investors. A similar tax structure should be
worked out for REITs as well.
2. There should be no Capital Gains Tax on sale of assets of REITs.
3. The stamp duty payable by the REIT should be considered VATable. All assets covered under REIT
should pay duty on the incremental sale value.
4. The cash flows for the REITs up to 90 % needs to be distributed and not the profits made on account
of accrued gains.
5. Dividend by way of bonus issue may be considered.
6. The concept of non-income generating assets needs to be defined since there is a limit of 20% on
non income generating assets.
7. Among the various classes of Real Estate, the one which is most needed in India today, is Housing.
Middle Income Housing is developed and sold by the Developer to individual home owners. This
asset class, partly due to the prevailing tenancy laws, is not held by Real Estate Developers for giving
out on Rent. Section 51 (1) & (2) stipulates that investment should only be in income-generating
real estate. This would mean that funds from REITs cannot be employed for residential housing at
all. In other words, REITs will only promote commercial buildings and give no assistance whatsoever
to promote Housing.
It is therefore recommended that Section 51 be amended so as to allow REITs to invest in housing
development activities as well, and not be restricted to income-generating real estate only.
8. The real estate property covers the purchase and leasehold rights. The rights under the license
agreement are not covered. It is suggested to cover the license agreements as well.
9. If the intention of the legislation is to prevent money from REITs being invested in speculative land
holdings, this can be achieved by inserting a stipulation that wherever REITs invest in vacant land,
construction must commence within 6 months of receipt of all approvals pursuant to such
investment.
10. Increase in exposure of REITs to single project and all projects of the group as a whole to say 30%
and 40% respectively should be allowed.
11. Clarification is sought on the role of the “credit rating agency” and “appraising agency”. It is
suggested to have guidelines for them.
12. Chapter I, Section 2 (aa) is incomplete and should add “by way of” after the word Trust.
13. Opening subheading of Chapter II “No person other than REIT to make public offer or seek listing of
units” should be incorporated as a section under the Act.
14. Definition of “connecting person” includes “controlling person”. While “Control or controlling
interest” has been defined, controlling person has not been defined in the draft.
15. In Chapter I definition of controlling interest in 2 j (iii) defined as “Majority of Directors in any
Company….” Seek clarity on implementation of Chapter II, section 12 (e) in case the individual
directors are changed in a step wise manner.
i
Indian Real Estate and the prospects for REITs, June 2007, Moodys and ICRA
ii
Grant Thornton-CII “Future Cities – The choices we make today” 2011
iii
SEBI Venture Capital Investment Details