What’s So Real About Real Estate Anyway?

*An eight-part series covering the commercial and legal considerations of REIT listings in India. Click here to read Part 1.

India is an outlier in global Real Estate Investment Trust (REIT) regimes. It is the only country with dedicated legislation for REITs and Infrastructure Investment Trusts (while the US and Japan permit REITs to hold certain infrastructure assets, there is no separate legislation). In a way, this showcases the maturity of the regulatory thought process, and it has already been recognised that there is a compelling case for other developed jurisdictions to introduce a similar InvIT model, which meets the needs of investors as well as protects existing REIT legislation (Source: EY – Global perspectives, 2018 REIT Report).

On a standalone basis, ‘non-traditional’ REITs listed only in the US are the second-largest REIT sector globally (with a market cap of USD 480 billion). These non-traditional asset types include healthcare, data centres, billboards, communication towers, student accommodation, single family rental and fiber optic transmission lines (Source: EY – Global perspectives, 2018 REIT Report). Surprisingly, if most of these asset classes were to plan a REIT listing in India, they would have to think twice – their assets may or may not be eligible ‘real estate’ within the meaning of the REIT Regulations. Which brings us to the question, what exactly is real estate for the purpose of the REIT Regulations?

The Infrastructure Carve-out

The REIT Regulations define real estate in an exclusionary manner. Any property that is not ‘infrastructure’, is understood to be real estate. The term infrastructure itself, however, is not defined anywhere. Instead, we have a harmonised list of sub-sectors (Harmonised List) prescribed by the Ministry of Finance (MoF), which falls within the purview of infrastructure. These sub-sectors, presently numbering 34, are broadly bucketed into five categories – transport and logistics, energy, water and sanitation, communication, and social and commercial infrastructure.

In a way, by providing an exhaustive list of infrastructure sub-sectors, the Harmonised List also defines the contours of what is real estate for the purposes of the REIT regulations (in addition to setting out what is infrastructure for the purpose of the InvIT Regulations). However, it is pertinent to note that the Harmonised List was put together with neither the REIT nor the InvIT regime in mind.

The background of the Harmonised List supports this inference. The Cabinet Committee on Infrastructure (Committee) was formed by the PMO to provide a uniform definition of infrastructure “meant to guide all the agencies responsible for supporting infrastructure in various ways”. In its discussions, the Committee recognised the need to update the list on an ongoing basis, and set out the following characteristics and parameters for the addition of any new sub-sector to the Harmonised List:




Over the years, the Harmonised List has largely remained true to the above considerations. However, as opposed to sectors such as roads, bridges, ports, urban public transport, water supply pipelines, even affordable housing, which are infrastructure in the classic sense of being building blocks of public infrastructure, the list also includes sub-sectors such as logistics, educational institutions, stadiums and sports facilities, hospitals, hotels, malls and theatres. These are asset classes for which, depending on an appropriate structure and commercial model, a case can be made for inclusion in a REIT. The considerations here can be multi-faceted – the asset class not qualifying within the spirit of infrastructure, the inter-connectivity and interdependence of the asset class with other vanilla real estate assets or the asset class not meeting the eligibility requirements vis-à-vis minimum investment/ area.

Additional Considerations Under the REIT Regulations

Once an asset is established as non-infrastructure (and, therefore, real estate), it still has to comply with the eligibility requirements prescribed under the REIT regulations to form part of a REIT. As a starting point, the regulations require a majority of the REIT assets to be ‘completed’ and ‘income generating’.

On the first prong, while the REIT Regulations simply define a completed property as any property for which the OC has been received, the assessment of whether a property is completed or not is far from simple. It is not uncommon for developers to receive OCs for a part of their project or even a part of a single building, in which case the determination of ‘completed’ becomes tricky. Similarly, in case the local regulations only prescribe a completion certificate as opposed to an OC, or if the two terms are used interchangeably, the question of whether the asset is completed or not remains open to interpretation.

The discussion becomes even more interesting if we take a step back to our discussion of infrastructure v. real estate. Let’s say a particular asset is not infrastructure and is, therefore, real estate. If the very concept of an OC is not even applicable to such an asset/ asset-class, what would be an equivalent approach to establish that the asset is completed?

As opposed to the first prong, the second prong of ‘income generating’ is left entirely open to interpretation under the REIT Regulations. And given that the regulations are presently in a nascent stage, it is likely that the jurisprudence will evolve to accommodate diverse revenue recognition models prevalent in the real estate sector – such as operation and management fees, lease maintenance, variable fees and revenue sharing – within the purview of ‘income’ within the meaning of the REIT Regulations.

Way Forward

The REIT Regulations and the InvIT Regulations are both nascent regulatory regimes. Concepts of ‘real estate’ and ‘infrastructure’, defined under their respective regulations (evidently, in deceptively simple terms), are still fluid and bound to evolve over time with the diversity of asset classes and issuers attempting to access capital through REITs and InvITs. While a clear, definitive answer to the question posed by this post may not be available at this stage, the right legal and commercial guidance, with regulatory blessing, will pave the way for REITs with varied asset classes in India.