REITs: The way for­ward

SEBI’s ap­proval of guide­lines for REITS comes with many pos­i­tive changes, in­clud­ing re­duc­ing as­set size re­quire­ment

HT Estates - - HTESTATES -

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.

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