1. Booster Shot For Real Estate
Investment Trusts
All decks are being cleared to allow
foreign investment in the cash-
starved Indian real estate sector.
The Finance Ministry has floated a
draft cabinet note to amend the
Foreign Exchange Management Act
(FEMA) to permit overseas funds in
real estate investment trusts
(REITs).
At present, foreign investment in real estate
assets, specifically completed commercial real estate properties, whether rent yielding
or not, is not permitted under FEMA.
Finance minister Arun Jaitley had announced REITS and infrastructure investment
trusts in his budget last year in July enable developers and banks to reduce their
debt. Subsequently, the Securities & Exchange Board of India (Sebi), the market
regulator, notified REIT regulations in September and unveiled a framework to set up
REITs. Provisions in FEMA, however, prevented the operationalization of the new
structure, which has been used successfully in several countries.
How will REITs help real estate funding?
REITs pool capital from investors to purchase and manage income-yielding real
estate assets or mortgage loans and can be traded on major stock exchanges like
normal stocks. REITs are expected to attract big-ticket funds to the real estate sector
and help make it more efficient and transparent. These instruments would also enable
banks to free up their balance sheet by reducing loan exposures and creating head
room to finance fresh projects. The formation of REITs will encourage the creation of
big-ticket institutional-grade buildings, and will give developers a ready outlet for
development projects.
Indian REITs, like many others around the world, will be required to pay out 90
percent of their income from stable assets to investors. That will result in a twice-
yearly dividend. It makes REITs perfect “widows and orphans” stocks since they spin
off cash regularly and are relatively low-risk.
Only 20 percent of an Indian REIT’s assets can be invested in development, the
2. riskiest end of the real-estate industry or in cash and cash equivalents for liquidity
management, with a maximum of 10 percent for the former. The remaining 80
percent of the fund’s assets must be invested in income-producing property. Since
those projects – often office buildings or shopping malls – have already been
developed and already have tenants, their income stream is relatively easy to predict.
While they may increase in value, the REIT will hold them long-term and won’t trade
in and out of real estate.
According to experts, REITs could provide a positive push to the Indian capital
markets and real estate and infrastructure sectors. It could also create liquidity to
some extent for real estate and infrastructure players.
“REITs will be a booster rocket for investments into the country, and I will be holding
my breath for much-anticipated announcement (regarding REITs) during Finance
Minister Arun Jaitley’s speech next month,” said Anuj Puri, Chairman and Country
Head, Jones Lang LaSalle India.
Budget announcements expected to push REITs
Finance minister Arun Jaitley, in his budget next month, is expected to announce a
slew of measures to make REITs the growth drivers for the fast-expanding
commercial real estate sector.
He is likely to rework the three-year lock-in for investments in REITs to avail
exemption from capital gains tax, and bring them on par with listed securities.
Investments in securities are currently exempt from capital gains tax after one year.
There is also a possibility of completely exempting REITs from payment of minimum
alternate tax (MAT) that’s applicable to all companies.
The Reserve Bank of India (RBI) Governor Raghuram Rajan, in his financial stability
report shared with Finance Secretary Rajiv Mehrishi, has also favoured giving a big
push to REITs that are very popular as investment instruments across Europe.
A CBRE South Asia note has projected that in case the REITs are made more
attractive in terms of reducing tax liabilities, India has the potential to attract about
$20 billion to such trusts in the near term.
Meanwhile, Private equity (PE) firm Blackstone and its local partner, Bangalore-
based realty developer Embassy Group, are targeting to list India’s first REIT in the
second quarter of FY16 and raise approximately Rs 5,000 crore.
Real estate sector experts are looking forward to the first REIT listing as it will serve
as a reference point for others to follow, especially at a time when commercial real
estate transactions are expected to pick up in wake of an anticipated upswing in the
economic activity.
According to experts, the initial lot may face a lot of challenges while entering the
segment. “Listing of new REITs will be slow and steady. While REITs will succeed
over the longer term, they need to pass through the challenging phase ahead for them
over the next two years,” said Anuj Puri of Jones Lang LaSalle India.
Source: CommonFloor.com
