A Real Estate Investment Trust (REIT) operates as a tiered structure, where the Sponsor establishes the REIT, which then invests in eligible real estate projects either directly or through special purpose vehicles (SPVs).

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The Sponsor establishes and forms the REIT, then transfers assets to it and raises funds from the public. REIT Regulations require the Sponsor to hold units for three years, aligning their interests with unit holders.

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The sponsor appoints a trustee who holds the assets on behalf of the unitholders. The trustee, in turn, designates a manager responsible for managing the REIT assets and making investment decisions.

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REIT Regulations mandate the Sponsor to hold a certain percentage of units of REIT for a period of three years.

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REIT is required to pay out at least 90% of its Net Taxable Income to its unitholders in the form of dividends and interest.

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Different types of REITs are available globally based on the type of real estate holdings Retail REITs, Residential REITs, Healthcare REITs, Office REITs, and Mortgage REITs

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The regulator for Real Estate Investment Trusts (REITs) in India is the Securities and Exchange Board of India (SEBI).

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The Trust operates through a 3-tiered structure consisting of a Sponsor, a Manager, and a Trustee.

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A REIT is required to allocate a minimum of 80% of its investments to commercial properties that are eligible for rental purposes.

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Stock market listing of REIT is mandatory.

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Risk factors associated with REITs include:

• Market risk: REIT values fluctuate with market and economic conditions.
• Interest rate risk: REITs are sensitive to interest rates and rising rates can hurt their value.
• Tenant risk: REITs face revenue challenges from vacancies and non-payment of rent, as their income depends on tenant occupancy and payment behavior.
• Regulatory risk: REITs' operations and profitability may be affected by changes in regulations or policies

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The following are the benefits from an investor's perspective:

• REITs offer a more cost-effective and streamlined way to invest in real estate.
• REITs add a new asset class to portfolios, diversifying risk and protecting against inflation and market fluctuations.
• REITs distribute at least 90% of their income annually, ensuring a steady stream of income for investors.
• REITs are designed to be tax efficient.

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All types of investors, whether domestic or foreign, retail or institutional, can buy REIT units in India. REIT units can be freely bought or sold on leading stock exchanges and investors need a Demat account to transact.

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Income-producing real estate projects, including commercial properties such as offices, hotels, retail stores, industrial facilities, and healthcare facilities.

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REITs are not permitted to invest in residential (houses, apartments) or speculative land banks.

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Unit holder approval is needed for debt to capitalisation above 25%. Debt to capitalisation is capped at 49%.

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REITs collect money from investors to purchase income-generating properties, which are leased to tenants. Investors receive rental income as dividends. REITs offer a combination of regular income and capital appreciation, acting as a hybrid between Equity and Fixed Income investments.

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There should be 100 shareholders. Less than 5 shareholders should not have held 50% of their shares during a financial year.

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Interest from REIT units is taxed at the resident’s applicable tax slab rate.

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Dividend income is tax-exempt if the REIT’s SPV has not opted for the lower tax regime under section 115BAA of the Income-tax Act, 1961. Dividend income is taxable at the hands of the unitholder at the applicable tax slab rate if the REIT’s SPV has opted for the lower tax regime under section 115BAA of the Income-tax Act, 1961. Furthermore, in such case, the Reit is required to deduct taxes at the rate of 10% under section 194LBA of the act from the dividend.

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