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Monday, October 6, 2014

Implications of REITs

 

Implications of REITs

 

REITs, PROVIDE LOW AND MID-INCOME INVESTORS WITH THE OPPORTUNITY OF BECOMING STAKEHOLDERS IN A PORTFOLIO OF REAL ESTATE ASSETS, WHICH WOULD OTHERWISE HAVE NOT BEEN FEASIBLE. REITS ORIGINATED IN THE USA, AND FOLLOWING THEIRSUCCESS WERE REPLICATED ACROSS NUMEROUS ECONOMIES ACROSS THE GLOBE

 

The biggest announcement for the real estate sector proposed by the newly elected government in its Union Budget 2014-15 was the Securities and Exchange Board of India (SEBI) being directed to introduce Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts in India. With SEBI approving the REITs entry, it is expected that the instrument will provide alternative funding channels to the realty sector. Going forward, it will also act as a key enabler for capital markets in the country, and provide investors with exit options. The industry perceives this announcement as the single most consequential reform witnessed in India's realty sector in recent times, which will have a significant positive impact on the market in times to come.

Investments in India's commercial real estate has largely remained out of bounds for the country's average citizen, as the realty sector so far lacked any monetization vehicle for the capital intensive sub-sectors of the commercial sector. Additionally, since such projects require huge capital inflow, broad based portfolio investments by individual investors has hardly been feasible. A possible solution to this could now be the introduction of REITs and Real Estate Mutual Funds (REMFs).

These investment vehicles are characterized by their investment in real estate assets as well as limited liability for unit holders. REITs, for instance, provide low and mid-income investors with the opportunity of becoming stakeholders in a portfolio of real estate assets, which would otherwise have not been feasible. REITs originated in the USA, and following their success were replicated across numerous economies across the globe. The USA, Australia, Japan and Singapore are among the most developed REITREMF markets in the world today, with their necessary regulatory frameworks in place, and significant representation of such listed instruments on their respective stock markets. Meanwhile, although India had issued draft regulations in December 2007, and draft guidelines in October 2013, SEBI was yet to formalize any definite introduction of the investment instrument in the India realty market.

The much-awaited clarity on taxation of REITs was provided in the recently presented Union Budget. Long-term capital gains and dividends to investors have also been made tax-free; while Infrastructure Investment Trusts (for Public Private Partnership arrangements in infrastructure projects) were provided a pass through taxation status too.

While we are still awaiting detailed guidelines from the government on the implementation of REITs in India, the draft guidelines circulated by SEBI in October 2013 proposed a minimum capitalization of INR 1,000 crore, and an initial offer size of INR 250 crore. At least 90% of the investment was required to be in 'revenue generating completed' properties. The minimum subscription size was to be INR 2 lakh, with resident as well foreign investors to be allowed to invest in the REIT. Numerous funds such as Blackstone have already started building a corpus of well-leased or sold completed commercial and residential properties, so that they are ready to issue as and when the Government of India releases its final policy framework on REITs.

At a time when the realty sector is struggling for alternate avenues of funding-other than traditional banks and financial institutions-and private players are sourcing institutional capital, permitting REITs can act as a key enabler for capital markets in the country, and provide investors with exit options.

Although a detailed clarification on the tax structure for REITs is still awaited, nonetheless, this is a positive move that would go a long way in reviving global investor sentiments in the India market. Apart from a low entry level, this will now provide an avenue for channelizing retail funds into the realty sector. The instrument will provide for a safe and diversified investment option at reduced risks all under professional management, to ensure the highest returns on investment.

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