REITs to be Introduced in the Country
13 Apr 2016
An REIT or Real Estate Investment Trust is a company that allows small investors to invest in income-producing real estate. In other words, it owns and finances income-generating properties, which may include commercial buildings, shopping malls, apartments, hotels, resorts, warehouses and mortgages. Unlike real estate companies, an REIT does not develop real estate properties to sell them, but buys and develops them to run them as a part of its own investment portfolio.
REITs have not gained popularity in the Indian market because of unattractive tax structure and lack of transparency in regulations. Lately, the Indian government has come up with various measures to make REIT attractive for investors.
The issues regarding tax structure and transparency in regulations in REITs were recognised by SEBI (Securities and Exchange Board of India). In the year 2014, it eased out norms such as those related to DDT (Dividend Distribution Tax) on REITs and allowing participation of FIIs (Foreign Institutional Investors) in REITs investment.
Sanjay Dutt of Cushman & Wakefield says that tax reforms of the DDT at SPV level (Special Purpose Vehicle) means that the assets are not required to pay taxes on dividend that it passes onto the REIT. This exemption of DDT will allow SPVs to earn profits, and as a result, appear attractive for investors to enter the market.
Dealing with Obstacles
Over a period of time, the government, along with SEBI, has tried to remove the obstacles from the structure of REITs, in order to make them attractive for developers and investors.
Vinod Rohira, Director at K Raheja states that the Indian government has soon adopted REITs' legislation, and in two years, has been able to bring in the REITs' law in place, which is praiseworthy. However, he also said that it is too early to list REITs, and could take around 12 to 18 months for the first few REITs to get listed. The main issue with the launch of REIT was DDT, which was resolved, but a few more things need correction. He followed up by stating that REITs in Asia and Europe are a combination of insurance and banking industries that buy REITs as a security, and such initiatives are going to come to India soon.
Changes in Tax
Anshuman Magazine of CBRE South Asia Pvt. Ltd. states that the Finance Minister addressed the real estate sector's expectations of REITs exemption from taxation on the distribution of dividends in this year's budget statement, which sounds positive for the sector. Any distribution made out of the SPV income to the REIT, will not be subjected to any DDT. While the fine print on the announcement still needs to be reviewed, it is expected that after dealing with these obstacles, various investors would show interest to launch REITs in India.
REITs will Help the Realty Market Grow
REITs require no purchase of physical property for investment, as they trade on stock exchanges. An investor can buy or sell the REITs' units at any moment, displaying benefits of high liquidity. Even small investors can invest in commercial properties through REITs, which was otherwise not possible as there was huge fund involvement. REITs would help developers raise funds and assist in timely delivery of projects.