REITs to be a gamechanger for real estate

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Up to $8 billion investments may flow through this route

With the government clearing roadblocks for real estate investment trusts (REITs), several real estate biggies like DLF, Tata Realty and Infrastructure, Prestige Group and Panchshil Realty are considering raising funds through this route.

It is estimated that Indian companies could raise around $6-8 billion by launching REITs.

Finance minister Arun Jaitley announced in the budget that REITs will be given tax pass-through status, paving the way for their introduction in the country.

REITs are designed to provide a structure for real estate investments similar to the structure mutual funds provide for investment in stocks.

Saurabh Chawla, executive director DLF told Financial Chronicle “Definitely, we would consider REITs for fund raising but at the moment it is difficult to mention when we would start. We are trying to figure out how exactly it is to be done.”

Chawla said it would be beneficial for both investors and developers.

Real estate experts said REITs would be a gamechanger for the real estate sector and developers with focus on commercial real estate would benefit significantly.

Through REITs, there is opportunity of raising upto $8 billion through approximately 100 million square feet of commercial real estate available in the country, said Rajeev Bairathi, executive director, capital transaction group & north India at Knight Frank India.

However, experts said that more clarity is required on taxation and it would be at least a couple of quarters before any REIT is set up in the country.

A REIT would own -- and in most cases operate -- income-producing property. REITs own many types of commercial real estate, from office and apartment buildings to warehouses, hotels, hospitals, shopping centres, even plantations.

Some REITs also engage in financing real estate. These trusts can be publicly or privately held.

Bairathi said while DLF, the largest real estate company in the country, has around 30 million sq ft of commercial space, Blackstone has around 20 million sq ft. Most of the real estate companies holding large commercial space like Panchshil Realty, Raheja Group, Indiabulls, among others, would focus on REITs to raise funds.

Many developers were shying away from investing in commercial real estate due to lack of funds but with REITs, developers would be able to de-leverage their balance sheets and use the funds for repaying debt or use it as working capital.

Abhijeet Maheshwari, head of business development at Tata Realty and Infrastructure, said, “Our company is looking actively at creating a REIT platform. REIT is a game changer for the Indian real estate sector as it will be the first time that small investors will be able to buy into small amounts in Grade A properties for rental income. As the rental income appreciates over time, REITs provide an avenue of investment which is inflation hedged. These kind of investment avenues have been missing in India till now, while they have been very prevalent across the world.”

While there has been clarity with respect to a lot of provisions in the budget, a few issues are critical and need to be clarified -- like the interest income is taxed at highest marginal rate (33 per cent) in the hands of resident unit holders while for foreign investors the same potentially will get taxed at 5 per cent (depending on the jurisdiction). Thus the India sponsors of the REIT as well as investors will get affected adversely because of this provision. Also at the time of transfer of assets to REIT, even though there is no deferment of capital gains, but as per the regulations, sponsors may have to pay MAT which will again act as a roadblock, said Maheshwari, adding that the company expects government will clarify these issues going forward.

Lalit Kumar Jain, chairman, Kumar Urban Development said, "Incentivising REITs will help in easing liquidity requirement for developers, making way to raise easy capital and also provide access to retail investors’ benefits from regular income and appreciation benefits from real estate. This will not only help developers but also to Private Funds and Financial Institutions as well.

Jain added, “The proper implementation of REIT structure can generate almost Rs 1 lakh crore worth equity over a period.”

Pankaj Kapoor, chief executive, Liases Foras, said, “It is a good beginning as tax pass-through status has been granted to REITs, but there are still some taxation issues which need to be clarified."

Kapoor said not all developers are going to benefit from REITs it is the developers with big exposure to commercial real estate like DLF, Panchshil Realty and Prestige Group, among others, who are contemplating REITs and would benefit.

Bairathi of Knight Frank said the success of REITs would depend on what price the properties get listed and on the returns investors get.

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