Go InvIT as REIT may be wrong for Indian Hospitality

The hospitality industry in India was probably the first to welcome SEBI's (Securities and Exchange Board of India) decision to permit REITs (Real Estate Investment Trusts). After all REITs have played an important role in furthering the cause of the hospitality sector globally as a major investment asset class. On closer examination however; the set up structure laid out by SEBI does not look too appealing as far as hotels are concerned and in my opinion REITs may be the wrong way to go under the current guidelines. SEBI in its infinite wisdom - and honestly quite rightly - knowing the manipulative mindset that exists in our markets; has put in several checks and balances to protect the investors; but these, while great for real estate - are not really great for the hospitality players.

The key stipulations for a REIT in India:

1. Has to be listed.
2. Minimum corpus INR 5000 million (USD 1 = INR 60)
3. At least 25% offered to the public with a minimum of INR 2500 million
4. 80% of deployment should be in completed assets and minimum of 2 assets required.
5. Single mixed use facility does not qualify for being counted as multiple assets.
6. Maximum of 60% of corpus can be allocated to a single asset.
7. At least 75% of the space owned should be rent earning.
8. No more than 49% leverage permissible on the assets acquired (and is subject to consent of Unit holders)
9. Minimum 51% holding required to qualify as asset ownership.


So effectively, The REIT sponsors would have to create a middle risk company that on one hand would sign a management contract with a hotel operator and also pay a fixed rent to the REIT in order to satisfy the guidelines; as I don't know of many (if any) international hotel operators that would take a property on straight rent for management. There are some Indian operators who make take the risk of a thin fixed and large variable lease linked to operations but then justifying returns to yield based investors may be quite a task.

Then of course there are issues related to tax treatment on the distribution of dividends and interest to Unit holders; as well matters related to Capital Gains tax (applicable) and transfer duties that are making REITs unattractive to even the Real Estate sector.

There is general agreement that an Yield based REIT is not viable but a Yield + growth model may just do it for some subject to getting clarity from SEBI - expected closer to the budget in 2015 when SEBI will probably report a near failure in attracting REIT sponsors to register with it. The poor show has also got to do with the fact that as of now Foreign Investors cannot participate in REITs in India.

Fortunately, SEBI has also laid out guidelines for Infrastructure Investment Trusts (InvITs) that are marginally different than REITs given the nature of the infra sector; but those subtle differences may just make InvITs more inviting to hotels. The key differences being that an InvIT can be set up with a single asset and the rent requirement does not apply in infrastructure. The "Project" will be managed by an independent project manager (bravo - hotel management company). Why do hotels have the privilege of adopting Invits? Well as per Government's notification 3 star and above hotels in Cities/towns with a population of less than 1 million or projects costing more than Rs 200 crores qualify as infrastructure. Why only these? Don't ask me - spin doctoring happens everywhere. Let's be thankful that hospitality now has its 2 legs in 2 different sectors and can take advantage of benefits in both.

For now, the legal and accounting fraternity is raking in the moolah in slicing and dicing the guidelines to create viable structures for their clients. "Trust" is the key word in REITs and InvITs. Transparency, safety and quality along with stable returns is what most institutional and retail investors are after and hopefully both the lawyers and accountants will uphold that fact as primary in advising their clients who would be looking at sponsoring such structures in India.