New Delhi: Investors in India-focused property trusts in Singapore are likely to lose between 10% and 15% of their returns because of the difference in the way the value of properties is written down, according to standards followed in India and the city-state, accountants say.
The problem, which leads to a situation where profit available for distribution to shareholders is less than the cash generated from the business, has led Indiabulls Properties Investment Trust to look at options such as a share buy-back to reduce shareholders’ losses.
Indiabulls Properties is the first Indian real estate investment trust, or Reit, to be listed in Singapore.
Beyond boundary: Real estate companies such as DLF Ltd and Unitech Ltd are looking at listing their office trusts in Singapore, but have held back because of choppy market conditions and dwindling investor interest. (Photo: Rajeev Dabral/Mint)
Other real estate companies such as DLF Ltd, India’s largest realty company by market value, and Unitech Ltd are looking at listing their office trusts in Singapore, but have held back because of choppy market conditions and dwindling investor interest.
Reits, which use money from investors to purchase and manage property, are not allowed in India yet, forcing them to look at listing in locations such as Singapore where the Reit market is developed.
Their shares, or common units as they are known, are traded on exchanges and much of the income from the properties they own is distributed to investors.
Indian accounting standards require companies to set aside money to cover depreciation, if any, of the underlying property assets, but Singapore financial reporting standards (SFRS) do not.
According to Jai Mavani, executive director at accounting firm KPMG, based on the method of depreciation a company chooses, it has to write down assets by either 5% or 1.63%. This means less money is available for distribution to shareholders.
Although the depreciation provision in India acts to reduce taxes, it effectively traps cash in an Indian special purpose vehicle or SPV, formed to invest in property, Indiabulls said in an offer documents filed with Singapore stock exchange.
Indian real estate companies would be keen to offset the effect of the difference in accounting standards because any reduction in returns to shareholders would affect the price per share sold, and in turn the valuation of the property trust.
Unitech and DLF could not be reached for comment.
Ernst and Young, another accounting firm, declined to comment, saying it would conflict with the work it is doing for a client.
Indiabulls, which raised S$262 million from its Singapore offering, adopted a complex cross-ownership and shareholding structure to reduce its Reit tax liability, involving the creation of two SPVs in Mauritius—one of which is wholly owned by the Singapore entity—and one in India.
The depreciation provision kicks in at the level of the Indian SPV that’s meant to invest in properties in India, resulting in a reduction in dividends paid to the ultimate owner of the trust—the shareholders in Singapore.
The ownership structure would help the company execute a share-buyback plan.
“In general, share buy-back results in increase of earnings per share of remaining shareholders”, said Nitin Khandkar, senior vice-president at Keynote Capitals Ltd.
When a company repurchases its stock, the number of outstanding shares gets reduced, leading to higher earning per share. But given the complex ownership structure, “it needs to be seen how it impacts other shareholders,” Khandkar said.
India, meanwhile, is studying the introduction of real-estate mutual funds.
The stock market regulator, Securities and Exchange Board of India (Sebi), in April proposed guidelines requiring such funds to invest a minimum 35% in real estate and the rest in mortgage-backed securities and securities of companies dealing in realty stocks.