Mint Explainer: Why Sebi and Indian real estate investment trusts are in Hindenburg’s crossfire

Hindenburg Research in its latest report has alleged that since Madhabi Puri Buch was appointed the chairperson of the Securities and Exchange Board of India in March 2022, the markets regulator has implemented a raft of legislation on real estate investment trusts, or REITs. 

According to the US short seller, these regulations have benefited Blackstone Group, an asset management company in which the Sebi chief’s husband, Dhaval Buch, is an adviser. The journey of REITs in India, however, has been a mixed bag. Mint explains:

What is a REIT?

A REIT is a trust that owns a pool of income-generating real estate assets held as special purpose vehicles (SPVs). At least 80% of these assets must be completed and income-producing. 

REITs, which are mandated by Sebi to distribute at least 90% of their cash flow to unit holders, have a unique structure that allows investors to participate in the income generated by commercial real estate assets. 

Typically, the income of these trusts comes from the rentals received from such properties. REITs offer a less risky alternative to investing in under-construction properties and also provide a regular income.

When were REITs first approved?

A decade ago. Sebi had approved a long-pending proposal to introduce REITs in India, which would create a new investment avenue for institutional investors and wealthy individuals, and eventually ordinary investors. 

India, today, has three listed office REITs—Embassy REIT, Mindspace Business Parks REIT, and Brookfield India REIT—and one listed retail REIT, Nexus Select Trust. 

As per the Indian REITs Association, formed under Sebi’s guidance and the ministry of finance, the four listed REITs in India have ₹1,19,313 crore in gross assets under management, a market capitalization of over ₹75,000 crore, and a portfolio covering 113.5 million sq.ft. of Grade A office and retail spaces across the country.

Also read | Mint Explainer: Hindenburg’s latest salvo against the Sebi chief

What has Hindenburg Research said?

Blackstone Group is one of the largest investors and sponsors of REITs, and the largest commercial office space owner in India. Hindenburg alleged that Dhaval Buch’s appointment as an adviser to the global asset manager and subsequent regulatory changes in REITs by Madhabi Puri Buch benefited Blackstone. 

The country’s first real estate investment trust, Embassy REIT, sponsored by Blackstone, launched its initial public offering in April 2019. Dhaval Buch reportedly joined Blackstone as an adviser in July 2019. Madhabi Puri Buch was a whole time director with Sebi at the time.

India’s second listed commercial office REIT, Mindspace REIT, also backed by Blackstone, was launched in August 2020. Blackstone is also a sponsor of Nexus Select Trust, which got publicly listed in May 2023, as India’s first listed retail REIT. 

Hindenburg alleged that since Madhabi Puri Buch became the Sebi chairperson in March 2022, the market regulator has proposed and implemented many REIT legislations that have benefited Blackstone.

What are Blackstone’s major REITs transactions in India?

Blackstone first sold about a 5.8% stake in K Raheja Corp-backed Mindspace Business Parks REIT during the latter’s IPO in August 2020 for about $100 million. In its first major full exit from a REIT, in January 2022, Blackstone sold the remaining 9.2% holding in Mindspace REIT to Abu Dhabi Investment Authority for ₹1,740 crore. 

Then, in December 2023, Blackstone sold its entire 23.5% stake in Embassy REIT to foreign and domestic investors for about ₹7,100 crore. Most recently, on Friday, 9 August, the asset manager sold 315.5 million units in Nexus Select Trust for about ₹4,354 crore in a block deal. It continues to hold around 43% stake in Nexus REIT.

What are some of Sebi’s recent REIT amendments?

In June, the Sebi board approved several measures aimed at easing business for REITs and Infrastructure Investment Trusts (InvITs). One amendment reduced the payment distribution timeline to investors from 15 days to 5 working days. 

The regulator also approved changes allowing an investment manager of an InvIT or the manager of a REIT to convene a meeting of unit holders with a notice shorter than 21 days, provided there is consent from the unit holders. 

In recent proposed amendments, Sebi addressed market participants’ requests for clarification on the rights of unit holders to nominate a director to the board of the investment manager of REITs and InvITs. Sebi also issued a framework for a unit-based employment benefit scheme for investment trusts. 

In another major move, in March, Sebi issued regulations to amend the REIT Regulations 2014, establishing guidelines for the creation of small and medium real estate investment trusts, or SM REITs.

Overall, how have REITs performed in India?

The journey of REITs in India has been a mixed bag. Distribution per unit (DPU), which is dependent on cash flows earned, and price to net asset value (NAV) are two key metrics that retail investors consider while investing in REITs. Both have been underwhelming. 

REITs have exhibited notable market price to NAV discounts, underlining the divergence between their stock market prices and the estimated value of their underlying real estate assets. 

DPU for most REITs have been flat in recent years. DPU yield is the annualised DPU divided by the share price. 

The commercial office market was under pressure after the pandemic, leading to lower leasing and high vacancy levels. However, things may change going ahead. As people return to offices, investor interest in the office sector is likely to grow. The de-notification of special economic zones is also likely to help REITs make a turn around.