Asian REITs market capitalization to be $500bn by 2016

Asian REITs market capitalization to be $500bn by 2016
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First Published: Tue, Feb 19 2008. 03 20 PM IST
Updated: Tue, Feb 19 2008. 03 20 PM IST
New Delhi: Asian Real Estate Investment Trust (REITs) currently accounts for 10.6% of global REITs and is projected to touch market capitalization levels of $100 billion by 2010. This is expected to grow up to $500 billion in 8-10 years, according to industry chamber Assocham.
Market capitalization of REITs in Asia was around $2 billion in 2001, going up to almost $50 billion by 2005-06. Today, there are approximately 83 Asian based REITs with market capitalization of approximately $87 billion.
Among various clauses of real estate, the one most needed is that of housing. Housing is developed and sold by the developer to individual home owners. This asset class, partly due to prevailing tenancy laws, is not held by real estate developers for giving out on rent.
Section 51(1) & (2) stipulates that investment should only be in income-generating real estate implying that funds from REITs cannot be employed for residential housing. Also, REITs will only promote commercial buildings and provide no assistance to promote housing.
It is, therefore, recommended that Section 51 be amended to allow REITs to invest in housing development activities and not be restricted to income-generating real estate alone. Real estate property covers purchase and lease hold rights with rights under license agreement not being covered. It is suggested to cover the license agreements.
If the intention of legislation is to prevent money from REITs being invested in speculative land holdings, this can be achieved by inserting a stipulation that wherever REITs invest in vacant land, construction must commence within six months of receipt of all approvals, pursuant to such investment. Increase in exposure of REITs to single project and all projects of the group as a whole to say 30% and 40% respectively should be allowed.
Key Recommendations
* If proper REITs legislation is put in place in India, its growth will be phenomenal. In Asia particularly, REITs had a total rate of return of almost 22.6%, trailing only Europe at 28.5%. These return rates are significantly more attractive than the established US and Australian markets whose one-year returns were 13.97% and 24.31% respectively and three-year returns 17.2% and 18.7% respectively
* Currently Japan accounts for around 67% of Asian REITs market followed by Singapore, share of which is estimated at 19%. India has all the potential to aggressively promote REITs to provide housing facilities to its masses, provided suitable legislations with positive guidelines are brought out by the Indian government to regulate REITs
* India is one of six countries in Asia looking at the introduction of REITs laws including People’s Republic of China. In addition, the two other countries with REIT regime are considering reforms in their REITs which include Thailand and South Korea. Resultantly, there could be a significant increase in the number of REITs in Asia
* Capital gains tax on sale of assets of REITs to be waived off and stamp duty paid by such a trust converted into VAT. Capital gains tax on REITs assets sale roughly works out to over 25% presently. It is suggested that there be no capital gain tax on sale of assets of REITs and stamp duty payable on their assets be considered for VAT within the range of not more than 4%
Currently, stamp duty paid by REITs varies from 5% to 12½% and takes away revenues in the form of stamp duty payment by various state governments which REITs find cumbersome
* Taxation on REITs income to be such that it gets taxed only once
* Cash flow of REITs after 90% needs to be distributed and not the profit made on account of accrued gains and dividend by way of bonus issue to be considered for REITs
* Concept of non-income generating assets needs to be defined since there is a limit of 20% on non-income generating assets.
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First Published: Tue, Feb 19 2008. 03 20 PM IST