REITs- a trusted step to improve Realty Investment
The Securities and Exchange Board of India (SEBI) the setting up of real estate investment trusts (REITs), a move that may offer a new source of financing to India’s cash-strapped property developers.
Real Estate Investment Trust ( REITs) is a security stock which is invested and exchanged in real estate directly either through property, mortgage, apartments, shopping centre, offices, hotels and warehouses. It is an asset class that is capital intensive investment. The origin of REITs in United States by Congress in order to give all the investors the opportunity to invest in large scale diversified portfolios of income producing real estate like how they invest in other industry by the purchase of equity. The shareholders will benefit by owning stocks other corporations, the holders of REITs will earn a benefit which are derived from the income generation. REITs offer distinct advantages for investors: portfolio diversification, strong and reliable dividends, liquidity, solid long-term performance and transparency. REIT in a simplest way is real estate stock where you can pool your resources with other small investors and invest in large scale commercial real estate. It offers the benefits of ownership without the headache or expenses of being a landlord.
REITs are generally classified into 3 categories i.e. Equity REITs which are invested in and own properties.
The revenue comes principally form their properties. Mortgage REITs deal in investment and ownership of property mortgages which loan money for mortgages to owners of real estate or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans and the last one Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
Real Estate Investment Trust requires 90% of their taxable income to investors depending upon the external funding as the key sources of capital just like other stock offerings, publicly traded REITs collect funds via an initial public offering (IPO). Those funds are used to buy, develop and manage real estate assets. The IPO works just like other security offerings except that instead of purchasing stock in a single company, the buyer will own a portion of a managed pool of real estate. Income is generated through renting, leasing, or selling the properties and is distributed directly to the REIT holder on a regular basis.
In order for a company to qualify as a REIT, it must comply with certain provisions within the Internal Revenue Code. As required by the Tax Code, a REIT must:
• Be an entity that is taxable as a corporation
• Be managed by a board of directors or trustees
• Have shares that are fully transferable
• Have a minimum of 100 shareholders
• Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year
• Invest at least 75 percent of its total assets in real estate assets
• Derive at least 75 percent of its gross income from rents from real property or interest on mortgages financing real property
• Have no more than 25 percent of its assets consist of stock in taxable REIT subsidiaries
• Pay annually at least 90 percent of its taxable in- come in the form of shareholder dividends. With SEBI issuing the final guidelines and for the Real Estate Investment Trust (Reits) and Infrastructure Investment Trust (InvITs) – REITs like structure that would allow developers to monetize their infrastructure assets through a stock exchange listing .The real estate sector is likely to get a boost from these moves. According to research paper CRISIL produced the REITs would have the potential to hold at least 5% share of the total global real estate which pools at least 5 billion rupees ($81.78 million and have an initial issue size of at least 2.5 billion rupees for shareholders.
Finance Minister Arun Jaitley said, the regulator will simply registration of stock brokers and clearing members allowing them to obtain a unified registration for doing business in all stock exchanges and depositories in the country.
According to the experts, with Real Estate Funds can positively impact the India Realty market by enhancing liquidity through a more broad-based, and wider, participation of domestic retail investors, Institutionalization, Enhanced competition with institutional investors competing in a bigger way with the unorganized sector for market dominance, Higher professionalization, Greater acceptability for real estate as an investment asset class, Opportunities to retail investors to participate in the real estate sector, Asset diversification to corporate investors, Help build a vibrant, secondary real estate market, Improve sector transparency.
Bhairav Dalal, Associate Director, PwC said, if REITS (Real Estate and Infrastructure Investment Trusts) are allowed to invest in LLPs holding real estate, sponsors might contemplate setting up LLPs for Reits. This would provide slightly higher returns to investors, since dividend distribution tax is not applicable to profit distributions made by LLPs.
Shishir Baijal, Chairman & MD, Knight Frank India said, the move by SEBI to issue guidelines for REITs is laudable as this would bring in positive sentiments and clear confusion in cash strapped Real Estate. REITs specifically will prove to be effective tool for enhancing investments into the commercial real estate. REITs only look at completed income generating projects so a risk is minimum for investors.
Another Real Estate expert Anshuman Magazine, Chairman & MD, CBRE South Asia Pvt. Ltd in welcoming positive the SEBI decision said this move is a positive signal for India’s capital markets as a whole, and the realty sector in particular. Reducing the minimum requirement for commercial real estate asset sizes permitted to be listed in India REITs from Rs.1,000 crore to Rs.500 crore is likely to generate more income through this new funding channel and encourage many mid-sized development firms to consider this avenue. Having said that, although the government has already clarified that India REITs will be given ‘pass through taxation status’, clarifying the tax structure is of high importance at the moment. A successful India REIT market will require strong support from existing landlords and investors, as well as favorable market conditions. All in all, the establishment of the REIT market in India is still at a very nascent stage; and successful implementation and development will rest on a number of factors related to the regulatory environment, market conditions and issuers/investors.
SEBI has announced REITs and REMF a potential step in Real Estate sector which was the need of the hour for strict disclosures and other regulatory norm. Despite significant tax benefits for the sponsors of these business trusts, these new regulations would also be “revenue accretive” for the government in form of taxes. As per the proposed regulations, they would help in channelizing domestic investments into real estate and infrastructure sectors, and also help attract foreign capital for these fund-starved segments of the economy.