Hong Kong: India could follow other Asian countries this year in creating a market for real estate investment trusts (Reits), making it easier for investors to buy into the country’s new office blocks and shopping malls. The move would encourage foreign property funds, which are keen to join India’s construction boom, but are not allowed to own finished buildings.
Reits, or domestic funds, could buy the assets they develop, offering them an easier way to exit projects and take profits on investments. In December, market regulator Securities and Exchange Board of India (Sebi) issued draft guidelines for Reits, which pay most of the rent from their buildings to investors as dividends. But people in the industry say that unless the government also offers tax breaks in its upcoming Budget, a local Reit market would be a non-starter.
Building investment: The easing of foreign investment rules sparked India’s real estate boom.
The Sebi proposal contained no mention of the kind of tax breaks that gave a big push to other property trust markets, but it could be fleshed out in the Union Budget on 29 February. “It should have happened five years back,” said Nayan Shah, CEO of private developer Mayfair Housing Ltd, which wants to create a property trust of rental housing in Mumbai as soon as Reit regulations are in place. “Unfortunately, the government was never able to get over its regulations and set up a proper market.”
Arshdeep Sethi, head of capital markets at developer RMZ Corp., said he expected a market to be up and running within a year, adding that RMZ would also look to sell buildings into a trust.
Property trusts have caught on in Asia in the last five years, with investors enjoying stable yields that are higher than government bonds, and share price rises when rents and property values rise. However, they have not been immune to global stock market turmoil, with Singapore’s Reit index, for example, dropping 20% in the second half of last year and a further 13% so far this year. Reits would be riskier in India’s immature market, where a three-year building boom sparked by easing of foreign investment rules barely masks crumbling colonial-era infrastructure.
Overbuilding worriesy investors. Around 50 malls are being built in Gurgaon, near New Delhi. Around 100 million sq. ft of office space is to be built over three years for the information technology sector—equal to all the office blocks in Washington DC.
Reits would help cut risks for property investors in the country by improving information flows as listed securities must provide a constant stock market valuation of buildings and must divulge rental data. As they hanker for new assets to lift investor returns, Reits would also give foreign funds new buyers for their buildings.