REITs: The way forward
SEBI’s approval of guidelines for REITS comes with many positive changes, including reducing asset size requirement
The real estate sector has been at the forefront of the government’s agenda on account of its potential to propel economic growth significantly. The Indian real estate industry’s growing need for additional sources of funds and the success story of global REITs has been compelling enough to encourage the implementation of a similar regime in India with requisite adjustments, keeping in perspective the unique dynamics of Indian economy.
As a step in this direction, the Securities and Exchange Board of India (SEBI) released draft guidelines in October 2013 for REITs in India. SEBI, in its meeting dated August 10, 2014 approved the final guidelines for REITs in India. While the final REIT guidelines are still awaited, the SEBI press release highlights many positive changes carried out by SEBI to the draft REIT guidelines. Some of these changes include allowing REITs to have multiple sponsors, permitting REITs to raise money through private placements, reducing the asset size requirement of REITs to ₹ 500 crore, reducing the threshold for investment in completed and rent-generating properties to 80%, etc.
As widely expected by the industry, the Budget 2014 made the announcement of tax proposals for REITs in India. As a positive step, the government has announced a tax pass-through regime for REITs (effective from October 1, 2014) with the various streams of income being subject to a single level of tax. Some of the key tax issues that still need to be resolved include exempt- ing the SPVs held by REIT from dividend distribution tax, providing clarity on tax deductibility of interest payments by SPVs to REIT, reducing the holding period for REIT units to qualify as long term capital assets to 36 months, etc.
What more needs to be done
With the approval of final REIT regulations by SEBI and clarity in the tax provisions, the following other regulations require change for REITs to thrive in India: Change in SEBI regulations and FEMA/ FDI policy to allow foreign investment in REITs, Allowing insurance companies to invest in REITs, One time waiver of stamp duty at the time of acquisition of assets by REITs. Currently, stamp duties vary from state to state and are in the range of 5% to 14%, ECB framework to be amended to allow REIT to raise foreign currency loans / bonds. REITs are likely to infuse additional transparency and liquidity in the Indian real estate market. With Indian players showing an increased interest to list Indian real asset listings offshore, especially in Singapore exchange, SEBI’s move is likely to attract such markets onshore and increase depth of Indian real estate capital markets.
From a private equity perspective, REITs will also create exit opportunities for developers and financial investors allowing them to move completed assets to REIT and provide much needed liquidity in the market.