The coronavirus pandemic has brought the world economy to a grinding halt and has disrupted various sectors. The real estate and infrastructure sectors are among the most severely impacted.
One of the modes of raising funds in these sectors is by issuing units of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). These trusts pool certain assets and hold them for regular income.
The income generated by these trusts from various sources such as rentals and toll collections is then distributed among investors through dividends. For example, an REIT holding a commercial building that is put on lease to restaurants, offices, gyms and malls or an InvIT holding a road asset that generates income through toll collection.
As far as commercial real estate is concerned, most of them are shut (barring a few related to essential service businesses) due to the COVID-19 outbreak and subsequent lockdown. However, as a standard practice, most lease or rental agreements have protection of the “force majeure” clause incorporated.
The “force majeure” clause means protection from non-performance of the contract due to any natural calamity such as fire, flood, war or epidemic, which is not within the control of the non-performing party.
If COVID-19 is treated as force majeure, it may allow the occupants to not make payments or defer it. Further, the Ministry of Home Affairs has issued an order which stops landlords from demanding rent from students, workers and migrant labourers for a month. So, it will be very difficult to predict any outcome on the rental incomes. This would impact the investment returns on the units of the REITs holding these assets.
For infrastructure assets such as roads, toll collections had been low for some time due to self-imposed restrictions by people. Now, the road ministry has suspended toll collection at all toll plazas across India during the lockdown.
Even after the removal of travel restrictions, it will take time for things to become normal, which will hit collections. This will surely impact the returns on these assets.
Due to the uncertainty in the returns, the investment to be done via REITs and InvITs will take a back seat now. This will also impact financing activities that take place through such vehicles.
Indian authorities have been taking various measures to remove operational difficulties and have issued various circulars to streamline the compliances and operations of the REITs and InvITs. Below are a few such circulars:
Relaxation from compliance
The Securities and Exchange Board of India (SEBI), on March 23, extended the due date for regulatory filings and compliances for REITs and InvITs for the period ended March 31 by one month over and above the timelines.
Norms for encumbrance
On March 23, SEBI issued two circulars for REITs and InvITs issuing norms for creation of encumbrance on units of these investment vehicles, and subsequent invocation thereof.
SEBI’s REIT regulations and InvIT regulations provide for the mandatory holding of units of REITs and InvITs by their sponsors and sponsor groups for a minimum period of three years.
According to the said circulars, the sponsors and sponsor groups may create an encumbrance on such units during the mandatory holding period wherein encumbrance shall include pledge, lien, negative lien, non-disposal undertaking or any other covenant, transaction, condition or arrangement like an encumbrance.
The encumbrance created on the units of InvITs is not permitted to be invoked during the holding period of three years. However, the encumbrance created on the units of REITs are permitted to be invoked, subject to fulfillment of the following conditions:
(a) The person(s) invoking the encumbrance (whether directly or through any trustee or agent acting on its behalf) shall get itself or its nominee to become re-designated sponsor upon compliance with the terms and conditions for re-designation of sponsor as specified under REIT Regulations:
Provided that this condition shall not be applicable in case the person invoking such encumbrance is already a member of the sponsor group.
(b) The re-designated sponsor shall fulfill the obligations specified for the sponsor under REIT Regulations.
These circulars further provide for certain disclosure obligations for creating encumbrance on units, any change in the above information according to release or invocation of encumbrance, on the person holding these units and the manager of the investment trusts.
Conclusion
The regulators have been prompt in removing operational difficulties. However, the challenges like force majeure protection, which are more structural and may involve judicial intervention, may take some time to be ironed out.
There is uncertainty as regards whether such an event would be considered a force majeure event and also the commercial impact of such an event viz-a-viz the return on investments in REITs and InvITs.
In the backdrop of such uncertainties, institutional investors would like to assess the impact of COVID-19 on the economy, commercial real estate and infrastructure assets before finalizing any major investment calls.
All these factors are likely to push the timelines for issue and listing of various REITs and InvITs and may further delay the financing of various projects.
Rajeev Nair is principal associate and Nishant Sogani is associate at law firm Rajani Associates.