Will REITS be a game-changer for the Indian real-estate industry as it is expected to be?

Creating Real Wealth

Aurum-DealCurry CXO Dialogues__________________________________________________________

Webinar on the 25th of March 2015: 3pm – 4pm


Will REITS be a game-changer for the Indian real-estate industry as it is expected to be?

25th March 2015

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Sanjay has over 20 years of experience ,with a deep and on the ground understanding and exposure of handling more than a 100 mid and large sized transactions, across a range of sectors.Work Experience:• Ambit Corporate Finance , Co Founder and Managing Director• Arthur Andersen Global Corporate Finance• KPMG Corporate Finance• AF Ferguson and Co.Qualifications and Memberships• Chartered Accountant (The Institute of Chartered Accountants of India)• Advance Management Program (Kellogg Business School)• Bachelor of Commerce (Honors) - Shri Ram College of Commerce at University of Delhi• Member of RICS (A global real estate body) • Investor member - Indian Angel Network

Sanjay Bansal Founder and Managing Partner - Aurum Equity Partners

Speaker Profiles

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Sunil Agarwal Founder and CEO – Black Olive Ventures

Sunil has over 20 years of experience. He has all round exposure in Real Estate including Strategy, Development, Funds Management, Advisory, Corporate Real Estate, Education and Brokerage with MNCs and Local Firms. He is a team Leader for some large investment banking transactions. He has expertise in Residential, Commercial, Retail, Hospitality and allied sectors of real estate.

Work Experience:• Co-founder and CEO, South Asian Real Estate • VP, ICICI Ventures • Project manager, HSBC• DS Group, Colliers International, Chesterton MeghrajQualifications• MBA in Finance & Marketing (IMT, Ghaziabad)• M.Plan (Housing) (CEPT, Ahmedabad)• Civil Engineer (KNIT, Sultanpur)

Speaker Profiles

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Sita has over 20 years of in the areas of corporate, contract and commercial laws. She has been involved in providing advice on a wide range of issues from company formation, corporate governance and regulatory compliance to mergers and acquisitions, corporate restructurings, foreign investments, exchange control regulations and securities laws. She has been involved in advising on entry strategies and structuring in a variety of business sectors including aviation, telecom, real estate and IT. Her specific experience includes advise to global private equity funds as well as strategic investors on multiple investments in India, especially, in the area of aviation, telecom, ITES, real estate, oil & gas and publishing; advise to lenders/ investors on numerous real estate transactions; and advise to private equity arm of a leading investment bank on investment related transactions and its commercial arm on debt restructuring and acquisition of debt portfolios.

Speaker Profiles

Sita Khosla Partner – Dua Associates

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Creating Real Wealth 6

The need for REITS in IndiaInvestors have become wary of the real estate sector

PE Deals in RE FDI in RE

Interest rates on real estate loans have gone up significantly to over 15% compared to a starting rate of ~10% for clients in other sectors

Banks have started demanding the developer to bring in the equity first before they disburse the loans

Demand for security /collateral has risen up to 300% up from 150-200%

In FY13, bank credit to the commercial real estate sector grew by only 11.5 %, compared to overall credit growth of 14.3 %

Lenders have also become cautious

Source: KPMG, DIPP, FDI Statistics, Financial Express

Developers are struggling to control debt amid strained cash flows, increased input costs and low sales. REITs will open up more financing options for developers

Source: CEIC, RBI, Deutsche Bank

With 2 rate cuts since January 2015, and more expected going forward, REITs will become more attractive

Source: KPMG , DIPP, FDI Statistics

2006 2007 2008 2009 2010 2011 2012 20130

20406080

100120140160

46

139

112

31

71 68

44 46

17

65

55

4

14

24

11 10Number of PE deals Foreign PE deals

Source: KPMG , DIPP, FDI Statistics Source: KPMG , PE in RE Database, Venture Intelligence

PE inflow in Commercial RE

2006 2007 2008 2009 2010 2011 2012 20130.000.200.400.600.801.001.201.401.601.802.00

0.30

1.90

1.38

0.22

0.77

1.15

0.60

0.85

PE inflow in Commercial RE

05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-130

0.5

1

1.5

2

2.5

3

3.5

0.04

0.47

2.18

2.8 2.94

1.23

0.73

0.13

FDI in Real Estate Sector (USD bn)

Units - USD Billion


Real Estate Financing in India

Developers have been forced to rely on high cost options of financing in recent times Source: FICCI, E&Y

ECB 0 3 1 1 1PE Funds 0 3 3 2 1Offshore listing 1 3 1 1 1Capital Markets 1 3 2 1 1NBFC lending 1 1 3 3 3Bank lending 3 2 3 1 1Private lending 3 2 3 3 3REITS 0 0 0 0 3

Pre 2005 2005-2007 2008-2009 2010 - 2015 2015 onwards

Major Channels of Financing Real Estate in India

LRD (Lease Rental Discounting) REITs

• LRD is a form of loan offered against rental receipts derived from lease contracts with corporate tenants

• The borrower pledges the future rental earnings from the leased property to the bank for loan repayment

• Max Loan tenure – 12 years (market driven)• Max Loan amount – Low (typically 60% LTV)• High interest rate and fixed amortization schedule

• REITs a corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT).

• REIT invests in future income stream generated from a leased property in form of debt or equity or both.

• Tenure is flexible• Equity investment can be 100% of the asset value• Typically lower coupon and flexibility in repayment of

debt.


REITs Potential - Grade A assets in IndiaIndia has 376 million square feet of ‘Grade A’ office space valued at about USD 65-70 billion.

Cities with Grade A office space in India

Delhi NCR Mumbai Bengaluru Chennai Pune Kolkata Hyderabad

100 - 110 million square feet is estimated to be eligible for REITs in the next 2-3 years valued at about USD 20 billion.

52.6 million square feet - likely to be developed in 2015

57.1 million square feet - likely to be developed in 2016

REITs Standards - Grade A office space

Incremental growth of Grade A office space from 2001 to 2013. It clearly brings out the difference in the pace and size of construction across the seven cities.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

50

100

150

200

250

300

350

400

4 8 8

57

79

107 14

0

183

225

265

309 34

0

376

Indian Office Stock ( million sq ft)

Indian Office Stock ( million sq ft)Source: JLL, Report Destination India- A RE journey of Corporate Occupiers.

2007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

35

40

45

50

32.2

32.7

21.6

30.9

37

26.8

26.8

33

42.5

42 40.5 44

.4

30.4

36.3

India Office Space Absorption and Supply

Absorption (million sq ft) Supply (million sq ft)Source: JLL, Report Destination India- A RE journey of Corporate Occupiers.

2007 and 2008 - High absorption of office space reflect the pace of space take up by corporates i.e. business growth of a country.2010 - Demand for office space had increased by the end of 2010.2013 - Net absorption remained stable at 2012 level while New completions have increased i.e. high vacancy

SourceKPMG, Report Destination India, Are we ready for REITs?


REIT

Issu

es u

nits

The REIT Structure

Developer/ Sponsor

Unit Holders

Special Purpose Vehicle (SPV)

Physical Asset

Physical Asset

Physical Asset

Tenants Tenants Tenants

Trustee

REIT Manager

Sponsor sells SPV / Assets

REIT

rece

ives

Cas

h

Sponsor receives Cash / REIT Units

REIT

Trustee’s FeeActs o

n behalf of unit h

olders


Key Features

Structure The REIT shall be set up as a Trust under the provisions of the Indian Trusts Act, 1882

The REIT shall have parties such as trustee (registered with SEBI), sponsor, manager and principal valuer

Sponsor’ Role and Obligations

A REIT can have up to 3 sponsors with a consolidated minimum Net Worth of INR 1 billion/ INR 100 crores, where each sponsor should have a minimum Net Worth of INR 200 million/ INR 20 crores

The sponsor’s primary responsibility pertains to setting up of the REIT

The sponsor is required to hold at least 25% of total listed units of the REIT post-listing of the REIT for a period of 3 years from the date of listing

A holding of 15% of total listed units is to be maintained by the sponsors after 3 years from the date of listing

Offer of Units

After registration, the REIT shall raise funds initially through an initial offer and once listed, may subsequently raise funds through follow-on offers.

For making an initial offer, the size of the underlying assets should be at least INR 5 billion/ INR 500 crores

Minimum initial offer size of INR 2.5 billion/ INR 250 crores and minimum public float of 25%

Minimum unit size of INR 100,000 with a minimum subscription on 2 units

Investment Guidelines REITs can invest in the properties directly or through special purpose vehicles (SPV)

80% of the value of the assets of the REIT is to be invested in 'completed' and ‘rent generates properties'

Income and Distribution

At least 75% of the REIT revenues, other than gains arising from disposal of properties, is to be from rental, leasing and letting real estate assets

A REIT shall distribute not less than 90% of the net distributable cash flows, to its investors, at least on a half yearly basis


‘REITable Assets’

Investment Guideline Eligibility

Minimum 80% of value of the REIT assets shall be invested completed and rent generating properties

Not more than 10% of the value of REIT shall be invested ino under-construction properties (even if they are part of

already complete properties)o Complete but not rent producing properties

Not more than 20% of the value of REIT shall be invested ino listed or unlisted debt of companies or body corporate

in real estate sector excluding any investment made in debt of the SPV;

o Mortgage backed securities;o Equity shares of companies which derive not less than

75% of their operating income from real estate activity o government securities;o unutilized FSI (existing project)o TDR (existing project)o money market instruments or cash equivalents.

• 100% constructed properties**

• Rent Yielding properties**

• For listing purposes: (a) Minimum combined value INR 5 billion/ INR 500 Cr.; and (b) Minimum offer size of INR 2.5 billion/ INR 250 Cr. and 25% of the outstanding units

** -- property or real estate has been defined to mean land and any permanently attached improvements to it, whether leasehold or freehold and includes buildings, sheds, garages, fences, fittings, fixtures, warehouses, car parks, etc. and any other assets incidental to the ownership of real estate but does not include mortgage; further any asset qualifying the definition of the term infrastructure shall not be considered as real estate hereunder


Flow of Rental Income

SPV holding Rental Assets

Real Estate investment Trust (REIT)

REIT Debt Holders REIT Unit Holders

Operating Expenses

Corporate Taxes

Dividend Distribution Tax

Withholding Tax

Marginal Tax

Rental Income

Dividend Available to REIT

Interest income to REIT debt holders

Less

Less

Less

LessMinimum 90% of dividend distributed to Unit Holders

Pays

Physical Asset

Physical Asset


The REITs Ecosystem

Sponsor

Principal Advisor

REIT Manager

REIT

Auditor Principal Valuer Lawyers Merchant

BankerTax

Consultant

Trustee


The StakeholdersStakeholder Key Role and Responsibility

Sponsor Minimum post-IPO holding of Sponsor

a) 25% of the total listed units to be held by the Sponsors for 3 years from the date of listingb) Any excess of units held by Sponsors over 25% to be held for 1-year lock-infrom the date of listing c) 15% of the total listed units to be held by the Sponsors beyond 3 years from the date of listing

Trustee

Ensuring proper legal and marketable titles Execution of Investment Management Agreement Overseeing Manager’s activities and operations Review of related party transactions Appointing a new Manager within 3 months in the case of vacancy

Manager

Identifying and recommending investment opportunities Complying with the investment conditions and strategy Constituting a minimum 5 member Investment Committee Appointing other service providers Undertaking lease management (directly or through agents) Overseeing development activities and ensuring leasing the assets after completion Distributing dividends Ensuring half-yearly audit, valuation and reporting to its Board Reporting to the Trustee on prescribed matters

Principal Valuer

A “Registered Valuer” under Section 247 of the Companies Act 2013 The valuer shall not invest in the units of REIT A REIT, through a valuer, shall undertake full valuation/updation on a yearly basis

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Q&A

Aurum-DealCurry CXO Dialogues__________________________________________________________

Webinar on the 16th of January 2015: 3pm – 4pm

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Contact Aurum Equity Partners LLP Corporate Office

301 & 312 A, Suncity Business Tower

Sector 54, Gurgaon – 122002

India.

Fax: +91 124 4424485

Tel: +91 124 4424488

Website : www.aurumequity.com

Email: [email protected]

Facebook: https://www.facebook.com/aurumequity

LinkedIn: http://www.linkedin.com/pub/aurum-equity-partners-llp/86/91b/12

Contact me at -

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