REITs for CPSEs: An Outlook towards Real Estate Restructuring

Real Estate Investment Trusts (REITs) are a popular investment mechanism to invest in commercial real estate for investors without owning the real estate asset. The hype for REITs is further increased with the Union Budget of 2026, where the government declared the setting up of REITs to recycle and restructure the non-operational real estate properties of Central Public Sector Enterprises (CPSEs) in India. The under-utilised real estate assets would be financed by the REITs to develop infrastructure facilities for the public at large and generate income/interest for the REITs. 

The restructuring of real estate assets would promote the development of commercial and residential facilities in tier II and tier III cities. The article explains REITs, their types and a tripartite agreement of trust. It describes the investment and distribution mechanism of REITs under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (hereinafter Regulations 2014). Finally, it examines the importance of CPSEs and examines how REITs can be a tool for undertaking real estate restructuring of CPSEs in India. 

What are REITs?

REITs are classified as persons under Regulation 2(zm) who pool fifty crores or more to invest in real estate assets or properties by issuing units in such assets to at least 200 investors, who are called the unit holders. It also includes small and medium (SM) REITs, which focus on diversified properties, but do not include real estate companies that acquire or manage real estate assets or properties and issue securities. They are registered under the Registration Act, 1908 and the Indian Trust Act, 1882. They are vehicles through which investors can invest in the commercial real estate market and are regulated under the Regulations, 2014, and, in case of default, by the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. The investment portfolio of the REITs includes real estate options like malls, hotels, offices, service apartments, and residential societies, which give opportunities to unit holders to invest in high-priced real estate. REITs are established with the purpose of investing in real estate rather than conducting the sale of real estate. 

REITs as Tripartite Agreement 

To be recognised as a REIT, an individual has to register under Regulation 3 with the Securities and Exchange Board of India as a trust. A trust is an obligation created upon the ownership of property for the beneficialinterest of another under Section 3 of the Indian Trusts Act, 1882. The author of the trust declares the confidence, which is accepted by the trustee who owns the trust property, for the benefit of the beneficiary. The beneficial interest is the right of the beneficiary against the ownership right of the trustee. The instrument through which a trust is declared is called the instrument of trust. 

Under Regulation 2(zc) there are three fundamental parties to REIT, the sponsor, the manager, and the trustee.A tripartite agreement of trust is formed between the sponsor, trustee and the unit holder.  The trust is registered by the sponsor (author of the trust) who owns the real estate assets of the REIT under Regulation 11and appoints the trustee of the REIT. The sponsor transfers the ownership of the real estate asset prior to the allotment of units to the unitholders. The trustee holds the REIT assets for the benefit of the unit holders on behalf of the REIT in accordance with the trust deed. The trustee enters into an investment management agreement under Regulation 9 with the manager on behalf of the REIT.

Investment Criteria of REITs 

REITs can invest in real estate assets in two ways. Under Regulation 18(4) they shall invest 80% in completed and rent-generating properties directly or through Special Purpose Vehicles (SPVs) and/or Holding Companies(Holdco). It can invest 20% in assets under Regulation 18(5) like real estate properties, listed or unlisted debt, mortgaged securities, equity shares of listed companies and holding companies, government securities, and Transferable Development Rights (TDR) in India. Such assets under Regulation 2 (zn) are owned directly by REITs or through SPVs and/or Holdco on freehold or leasehold bases.

If REITs make an investment in real estate properties through companies or LLPs, the following criteria under Regulation 18 (5) (a) need to be followed:

1. An under-construction property shall be held by REIT for at least three years after completion.

2. An under-construction property, which is a part of an existing income-generating property, shall be held by the REIT for at least three years after completion.

3. A completed property which is not generating rent would be held by REIT for at least three years from the purchase of such property.

Distributions of Cash Flow

The income generated by the REITs through rent or interest has to be distributed to the unit holders of the REITs. SPVs have to distribute 90% of their income to REITs or the Holdco in proportion to their shareholding. A Holdco would distribute 100% of the income generated through SPVs and 90 % of self-generating income to REITs. 

The unit holders/ investors under Regulation 18(16) obtain dividends from the income generated by REITs. Such profits are calculated based on the cash flow generated by all the REIT assets. These include the real estate assets and other assets held by REITs, Holdco, or SPVs from which 90% of the income is distributed to unit holders as dividends.

Restructuring of Central Public Sector Enterprises 

PSEs are public sector enterprises which are owned, controlled and managed by the central, state or local government, where the government retails at least 51 % of the ownership. These are developed for public welfare, social interest, and provide commercial, industrial and infrastructural services to the public. It can be in the form of transport, electricity, manufacturing, banking etc. 

CPSEs are owned by the central government, and every year, the budget is allocated to such enterprises. Many CPSEs in different sectors have become non-functioning, or are facing liquidation due to the high cost of maintenance, inefficient technologies, inadequate marketing and the rise in competition from other private enterprises. Such CPSEs have been termed as sick enterprises due to underperformance. 

Apart from facing liquidation, many CPSEs have inefficient real estate assets which are not generating revenue for the Central Government or providing services to the public. The Government, in its Union Budget 2026, decided on the financial restructuring of such CPSEs by recycling their underutilised real estate properties through the establishment of REITs. Investments made by REITs in such properties can be used to build infrastructures like metros, shopping complexes and housing societies for public utility.

REITs for CPSEs

If REITs are registered under the Regulations, 2014 to recycle the underutilised properties of CPSEs, they would invest in and hold the properties for a minimum period of three years after the purchase, directly or through Holdco or SPVs. This could lead to financial restructuring of the properties and would be governed by the 20% investment criteria. 

When REITs invest in such properties of CPSEs, the income that is generated from such properties would be included in the cash flow generated by the REIT’s assets and hence included in the dividend distribution. The unit holders of REITs invest in the real estate properties of CPSEs where the central government has a shareholding. The REITs have been reclassified as equity-based instruments under the Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2025. Hence, it gives an option to the unit holders to invest in a stable instrument that would generate dividends.  

Development in Tier II and Tier III Cities 

The government classifies cities based on their population, infrastructure, economic development, healthcare facilities and administrative importance as Tier I, II or III cities. Infrastructural developments and multiple projects have been undertaken in Tier I cities, which are already populated and have a high cost of living. Tier II and Tier III cities are on the slower side of development, with easy access to lower labour costs, raw materials, and manufacturing costs along with benefits under Government schemes. Investment in such cities isbeneficial and can provide higher returns with the growing demand for real estate spaces. Due to the low cost of development and the higher potential of leasing, such spaces can be better alternatives for REIT investments and promote development in tier II and tier III cities. This promotes infrastructural development such as IT hubs, workspaces, township development, dining and retail spaces in tier II and tier III cities.

Conclusion 

The capital expenditure of CPSEs has been fulfilled through internal investments or private investments over the years. REITs would be a mechanism to invest in the real estate assets of non-operational CPSEs. This financial restructuring would have a stronger impact on the individual sector, along with a multiplier effect on the CPSEs in other sectors. REITs have been a mechanism for investing in commercial real estate properties. With the Union Budget 2026, a new angle has been given to the REIT investment in India. Such investment would enhance infrastructural development in tier II and tier III cities and provide unit holders with the opportunity to invest in equity shares of REITs