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10 Things To Know About SL – Real Estate Investment Trusts (REITs)


On 31st July 2020, Securities and Exchange Commission (SEC) published an Extraordinary Gazette (No. 2186/29) providing the regulatory framework for the establishment of Real Estate Investment Trust (REITs).  On 28th of August 2020, The Ceylon Chamber of Commerce (CCC) together with PwC Sri Lanka held a webinar with the key stakeholders to understand the framework better[1]. This article captures both key insights from the webinar and after comprehensive analysis of the legislation.

Here are 10 key insights that will help you understand more about REITs.

1. What is a REIT?

A REIT is a collective investment vehicle that owns and operates income generating real estate, facilitating individual investors to earn dividends from real estate investments without having to buy any assets.

REITs around the Globe

Globally there are 37 REITs markets with a total market capitalisation of USD 1.7 Trillion. Country wise breakdown of few selected countries are as follows:


Number of REITs





Hong Kong












2. What are the Permitted Investments under SL-REITs?

  • Fully completed buildings with a minimum occupancy of 20% or as specified by the SEC. These buildings can be obtained by way of outright purchase or through a lease agreement.
  • Any other property which has been approved by the SEC


Limits on investments thresholds:

  • Real estates - up to a maximum of 80% of the SL-REIT’s value
  • The balance 20% of the SL-REIT can be invested in Government Securities and or in Cash or Near Cash


However, the real estate threshold can exceed 80% with the prior approval of the SEC. A 5% allowance in excess of the above limits is also allowed when the limit is breached through an appreciation or depreciation of the Net Asset Value (NAV) of the SL-REIT.



3. What is a Managing Company?

A registered corporate body, who is licensed by SEC to manage or operate SL-REIT in accordance with the corporate governance requirements (including complying with board of directors requirements and a fulltime CEO).


Eligibility Criteria for a Managing Company is as follows:

  • A corporate body incorporated in Sri Lanka
  • Minimum 50% of the corporate body’s stated capital should consist of local equity.
  • Maintaining a minimum shareholders’ funds of LKR 50 Million at all times
  • Having identified the real estate which is to form the SL-REIT property and have entered into an agreement with the sponsor either for outright purchase or to lease
  • Having entered into a trust agreement with a Trustee approved by the SEC



4. Who is a Sponsor?

The Sponsor is the party who will own the property which will be transferred or leased out to the SL-REIT. More than one Sponsor can be identified by the Managing Company.

A Sponsor will hold 30% or more of the units issued at all times. However, these units are barred from being traded through the secondary market of a stock exchange at all times other than in the following instance.

  • When a Sponsor disposes the minimum holding of 30% in full[2] or in part[3] to an identified strategic investor.

In the above situation, the Managing Company is required to make an announcement on the following market day to the listed stock exchange with the minimum details of this new strategic investor and the unit price of the transaction.


5. Who is a Trustee?

A Trustee will be a bank licensed by the Central Bank of Sri Lanka and approved by the SEC. The duty of the Trustee will be to exercise due diligence in monitoring the operation and the management of the SL-REIT by the Managing Company. However, a Trustee will not hold units or other interests though it will be provided a fair and reasonable remuneration.


In addition to a Trustee, the below will/can be established to provide additional oversight on the operation and management of the SL-REIT by the Management Company:

  1. An investment committee (mandatory)
  2. Where necessary a panel of advisors



6. Will the Valuation of Units Be Fair and Accurate?

The Managing Company will have to ensure that a fair and accurate valuation of all assets and liabilities of the SL-REIT will be conducted. An independent valuer will be appointed by the Trustee in this regard for valuations and revaluations of real estates. The eligibility criteria of a valuer is given below. In addition, a valuation report will also be submitted by the valuer to the Managing Company and Trustee[4] which then will be submitted to SEC.

Eligibility criteria of a valuer:

  • Being a fellow of the Institute of valuers of Sri Lanka (IVSL) or is a fellow of the Royal Institute of Chartered Surveyors (RICS)
  • Having minimum of ten years’ experience of valuing similar property or the Government Chief valuer in the case of a state owned entity

The Managing Company will also have to obtain an independent verification from a firm of chartered accountants confirming that IPO price or listing price calculation is accurate and that the price is a reasonable representation of the value of assets of the SL-REIT. A copy of same is required to be submitted to the Trustee, SEC and CSE prior to listing.



7. What are the Public Offering and Listing Requirements of SL-REITs?

The requirements for the public offering and primary listing of a SL-REIT on an exchange licensed by the SEC will be as follows.

  • All REITs will be listed within three months of obtaining approval from the SEC
  • The SL-REIT will offer at least 20% of its units to the public at the time of listing
  • The SL-REIT will have a minimum of 100 unit holders at the time of listing
  • In order to be eligible to claim any applicable tax benefits, the SL-REIT will have to maintain a minimum of 50 unit holders at all times

In a public issue, the number of units issued should not exceed 70% of the NAV of the SL-REIT. The units issued to the public will constitute at least 20% of the approved fund size for a SL-REIT with total minimum asset value of LKR 500 million.



8. How will the Income Be Distributed?

Of the distributable income, 90% will be distributed. Distributions will only be made from collected and realized gains or realized income[5]. Any deviation from the dividend distributions which is less than 90% will result in disentitlement to any tax benefits available to Unit Trusts.



9. What is the Treatment for Related Party Transactions?

In a situation where the real estate of the SL-REIT is occupied partly or wholly by related parties, the Trustee will intervene and ensure that the terms and conditions of the tenancy agreements or lease agreements are entered into at arm’s length and under prevailing market conditions.

However, any lease of property of the SL-REIT either to the Managing Company, its shareholders, its directors, its key management personnel or to the sponsor and related parties will only be allowed when the full term and value of the agreement is covered by an on demand guarantee securing the payment of the lease rentals from a licensed Commercial Bank.



10. What are the Revenue Streams and Allowed Expenses for the Managing Company?


The Management Company can charge the following fees. However, it must be ensured that these fees will not exceed 4% of the total value of the SL-REIT.

  1. Front end fee
  2. Annual fee
  3. Performance fee on lease rentals
  4. Benchmark Performance fee


A management fee can also be charged subject to the approval of the Trustee considering the following areas.

  • Duties and responsibilities of the Managing Company
  • Interests of unit holders
  • Nature and extent of the services provided by the Managing Company
  • Size and composition of the property of the SL-REIT
  • Success of the Managing Company in meeting the SL-REIT’s investment objective
  • Need to maximize returns to unit holders
  • Maximum rate stipulated in the Trust Deed


Only expenses directly related and necessary in operating and administering a SL-REIT can be paid out of fund of the SL-REIT or any other expenses authorized by the SEC.


[2]When a sponsor disposes the minimum holding of 30% in full, the strategic investor will hold a minimum of 30% of the units in issue and not exceed 80% of the total units in issue

[3] When a sponsor partly disposes his holdings, both the sponsor and strategic investor in aggregate will hold a minimum of 30% of the units and not exceeding 80% of the total units in issue

[4] This report should be prepared within a period of six months immediately preceding the signing of the deed of sale/ the lease agreement or the date of the balance sheet of the SL-REIT of the relevant year, whichever is later

[5] unless approval of the unit holders (excluding the sponsor, strategic investor and any party acting in

concert with them) have been obtained by way of a resolution to decline to receive the distributable income in a given year or circumstance

Research Associate - EIU of The Ceylon Chamber of Commerce

Imesha Dissanayake

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