India will need to change parts of its legal and taxation framework for real estate investment trusts (REITs) to find a foothold in the country’s booming real estate market, according to a joint research paper by credit rating agencies, Moody’s Investors Service, and Icra Ltd.
REIT is a trust that uses the pooled capital of several investors—big and small—to purchase and manage property that generates income.
These instruments are traded on major exchanges, just like stocks, and enable sharing in both residential and other commercial or industrial properties. However, they pay yields in the form of dividends, no matter how the shares perform. Several issues need to be addressed before REITs come into India, the report said. (REITs, which are currently not allowed in India, have been a hot topic in the country since last year.)
For instance, India has one of the highest levels of property tax and stamp duty among the major countries in Asia. This has lead to high levels of non-registration of property transactions and transfers through the power-of-attorney route, it said. This muddies real ownership.
Additionally, high stamp duties, registration charges and capital gains tax lead to high incidence of cash transactions. These cash-based transactions are usually routed through many shell companies, the report added.
India also has a poor land title monitoring system because of which there are many ownership problems. These factors have led to corporate governance issues withinthe real estate companies over transparency and disclosure.
“There needs to be an improvement in the Indian real estate sector before REITs enter India,” said Raj Kaushik, chief financial officer of Vipul Ltd, a real estate company. “REITs are futuristic options that are present abroad. They will come into India. But before that happens, the real estate sector needs to be more organized.”
According to the report, common areas where there is a lack of clarity include the number and size of projects being executed by any property group, the use of customer advances and the nature of total indebtedness within the group. The emergence ofreal estate developers without a proven track record in the sector has worsened theseissues. “The real estate transaction process is cumbersome and the property industry’s transparency and disclosure levels could be improved,” said Vikas Aggarwal, co-author of the report and a senior vice-president of Icra.
Both Moody’s and Icra expect that the existing, extremely fragmented structure of the Indian real estate market will continue for much longer.