BackCash-strapped realty sector gets REIT boost
An REIT structure will reduce pressure on the banking system and make available fresh equity to developers
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Bangalore/Mumbai: Real estate investment trusts (REITs), which are close to becoming a reality, will help cash-strapped property developers access cheaper funds and give local investors the chance to invest in real estate without some of the attendant risks.
REITs, which own and manage a portfolio of real estate properties by pooling in money from several investors, will get pass-through entity status and other incentives, finance minister Arun Jaitley said on Thursday. A pass-through entity does not have to pay corporate tax.
An REIT structure will reduce the pressure on the banking system and make available fresh equity to developers.
The investment vehicle will attract long-term finance from foreign and domestic sources including non-resident Indians (NRI), Jaitley said.
REITs are listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors and list them as a trust.
“In spite of the tax breaks that are required for REITs in India to become a reality, there are a few challenges that lie ahead. With potential post-tax yields of 7-8% for REITs vs. 8-9% yield for Indian government securities, rentals of these commercial assets will need to appreciate by 4-5% annually along with rise in capital values to become an attractive investment option," said Adhidev Chattopadhyay, analyst with HDFC Securities Ltd.
Anuj Puri, country head and chairman of property consultant Jones Lang LaSalle India said it will take 9-12 months before developers and funds start listing assets. “We expect these players to raise close to $8-10 billion through this route", he said.
According to Puri, India has 18 large developers with a collective stock of 100 million sq. ft. which can be listed through this route.
Last October, the Securities and Exchange Board of India (Sebi) had issued a list of draft guidelines for REITs.
The Bombay Stock Exchange said on Thursday it has decided to form an 11-member advisory group, which will advise the exchange relating to the proposed framework on REITs.
Some of the key positives of investing in REITS, analysts said, are that they are open to all investors whether resident or foreign subject to the clause that the foreign investment would be subject to Reserve Bank of India (RBI) guidelines, sponsor of the REIT would continue to hold a percentage of the units (of the REIT) during its lifetime, among others.
The minimum asset size of ₹ 1,000 crore for the REIT will ensure that only serious developers and investors are involved, as per guidelines.
In a statement, DLF Ltd’s executive director Rajeev Talwar said, “The budget has also ended the ambiguity on the tax status of REITs and introduction of this instrument in the Indian market will reduce cost of business for both Indians and foreign investors. It will also attract global funds to invest in the sector. REITs will again benefit individuals since they can get a share in income in a rental asset even if they can’t buy into a project.
Realty firms with large rental portfolios such as DLF, Prestige Estates Projects Ltd and Phoenix Mills Ltd may be early beneficiaries as they seek to unlock capital through REIT listing, HDFC’s Chattopadhyay said.
Global private equity (PE) firm Blackstone Group Lp, for example, has steadily built a large office space portfolio in India with developer partners Embassy Property Developments Pvt. Ltd in the south and Panchshil Realty Ltd in western India.
Unlisted developers like K. Raheja Corp and RMZ Group too can utilize REITs, said Chattopadhay. “Introduction of REITs will provide a new source of capital to increase the stock of investment grade commercial office space while at the same time providing an avenue to retail investors to participate in the growing commercial real estate market.
However, given that the total supply of investment grade office space in India which would qualify for REITs is less than 30% of the total stock, it may lead to an asset bubble in the short to medium term," said Jasmeet Chhabra, managing director, Red Fort Capital Advisors Pvt Ltd, a PE firm.
Analysts indicate that retail investors may initially shy away from REITs, but they would be lapped up by foreign banks, PE funds and institutional investors.
The memorandum clarifies that apart from raising capital by issuing units, it can also raise debts directly both from resident as well as non-resident investors. The income-yielding assets would be held by the trust by acquiring controlling or other specific interest in an Indian company (SPV) from the sponsor.
“Units of the listed REIT will be taxed akin to listed equity shares i.e. long-term capital gains will be exempt and short-term capital gains would be taxed at 15%," said Gaurav Karnik, partner, tax and regulatory at EY.
The government has clarified that the capital gains that will arise during transfer of shares of the SPV with units of the business trust, the taxation of the gains will be deferred and the sponsor (promoter) of the property will be taxed at the time of disposal of the units.
madhurima.n@livemint.com
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