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Unlike countries like Japan and Singapore, which have designed rules around REITs to make them attractive, China and India have stumbled over how the vehicles are taxed. Photo: Mint
Unlike countries like Japan and Singapore, which have designed rules around REITs to make them attractive, China and India have stumbled over how the vehicles are taxed. Photo: Mint

The three-letter word holding back India, China REIT emergence

A three-letter word stands in the way of India and China opening up their real estate investment trust marketsTax

Singapore/Shanghai: A three-letter word is standing in the way of India and China opening up their real estate investment trust markets, which together could generate as much as an estimated $55 billion of listings: Tax.

Penghua Fund Management is putting the finishing touches to a trust with REIT-like characteristics, which will be the first of its kind to list in China as early as September. Indian Prime Minister Narendra Modi’s government in February announced tax changes in its budget to allow developers to set up REITs (Real estate investment trust) and help boost construction.

For almost a decade, Asia’s two-largest economies have been drafting rules that would allow developers to bundle properties into listed trusts to raise funds, while giving investors access for the first time to some of the world’s biggest pools of real estate assets. Unlike countries like Japan and Singapore, which have designed rules around REITs to make them attractive, China and India have stumbled over how the vehicles are taxed.

“Over the next one to two years, it will be challenging as it involves changing the tax regime and the regulatory regime," said Ng Beng Tiong, chief executive officer (CEO) at ARA Private funds, one of the largest REIT managers in Asia with listings in Singapore, Hong Kong and Malaysia. “For China, REITs have been talked about for close to 10 years and we have seen some baby steps now. They will take off eventually and the take-off point will be tax reforms."

Removal of double taxation and a waiver of duties while injecting assets into the trust are needed for REITs to attract investors, Singapore-based Tiong said.

Property-broker Cushman and Wakefield Inc. estimates that India could reap as much as $20 billion of potential listings and China as much as $35 billion.

Successful REITs

REITs in China need to pay taxes on the rental income before distributing dividends to shareholders, squeezing yields and eroding their attraction to investors, said Wang Gang, secretary-general of C-REITs Alliance, a Beijing-based industry group set up December to advocate for REITs.

While India’s budget proposed to rationalize the capital gains tax when trusts are listed and offered tax incentives on their rental income, it didn’t address corporate taxes and levies relating to dividend distribution tax.

“In all successful REIT models around the world, the REITs that work are those with a single point of taxation," said Singapore-based Peter Verwer, chief executive at the Asia Pacific Real Estate Association.

Developers in both countries are seeking new sources of cash as their housing markets have taken a beating and funding channels have been cut off. China has 344 million square feet of grade-A office space while India has about 203 million square feet of REIT-compliant offices, according to broker Jones Lang LaSalle Inc.

‘Potential wonderland’

China’s securities regulator in June approved the Penghua Fund product. It will bundle commercial properties of Shenzhen- based China Vanke Co., the nation’s largest residential homebuilder, and receive cash flows from rental income. Penghua raised 3 billion yuan selling units in the REIT, an offering that was 60% over-subscribed, ahead of its listing on the Shenzhen stock exchange.

“Vanke, as a developer, needs REITs very much; it opens a potential wonderland for us," said Chen Jie, the chief financial officer of Vanke’s Shenzhen unit.

Premature market

China has some prototype REITs that are not publicly traded and can be bought by institutional investors only, such as Citic Qihang Specific Asset Management Plan, which raised funds privately in 2014.

Chinese REITs don’t give investors ownership of the underlying assets in the listed trust, which typical REITs do, according to Barclays Plc. These quasi-REITs offer investors returns of 6% to 7%, according to Barclays.

The market needs tax breaks because the rental yields developers get are too low to satisfy investor returns, said Lin Deliang, CEO of Yuexiu Real Estate Investment Trust, the first Hong Kong-listed REIT investing in mainland properties.

“In China, the REIT market is still largely premature under the current tax regime," said Lin. “For developers, there is already a big gap between the 3% rental yield they receive and the 7% returns they give out, let alone the more than 5% financing costs."

India REITs

India is moving a step closer to listings that would enable the industry to raise equity and long-term financing. In May, the government said it would allow the trusts to tap foreign investors, previously prohibited under foreign-exchange rules. It also amended some taxes to remove levies on gains when an asset is transferred from the property owner to the REIT.

DLF Ltd, India’s largest developer by market value, plans to start two REITs—the first, an office one, by 31 March—as it seeks to monetize almost 30 million square feet of office and retail assets, the company said in May.

Publicly traded REITs in the Asia-Pacific region are worth about $230 billion, with Australia, Japan and Singapore the largest markets, according to data compiled by Bloomberg. Singapore, which has $42 billion of REIT assets, revamped its rules in July to increase transparency and corporate governance.

“A logical taxation regime will help propel much-needed governance, transparency and access to some of the most rapidly forming savings pools in the world for investors and developers," said Singapore-based Priyaranjan Kumar, regional executive director of capital markets at Cushman. Bloomberg

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