Retail rents for most shopping hubs remain stable in first quarter
defer monetization until the expiry of the LRD, or may be content with regular LRD top-ups.
Third, even though capital gains, minimum alternate tax and dividend distribution taxes have been exempted, the tax issues are not entirely sorted out for a REIT. Since capital gains tax exemption is only applicable if the shares of a company holding the real estate asset SPV are transferred to a REIT, interposition of an SPV between the asset and a REIT is inevitable. Such SPV is subject to corporate income tax of 30% on the rentals received, which could be reduced to the extent of interest expense in the SPV. Hence, it becomesimperative for the REIT to invest into the SPV substantially by way of debt and purchase equity at nominal value, which could work in the current construct since most such assets are anyways about 60% leveraged. Whilst there is no withholding on the interest income received by the REIT, when the REIT distributes such interest income to its unit holders, the non-resident is subjected to a mere 5% tax (creditable in home jurisdiction), whereas an Indian resident is subjected to tax at the maximum marginal rate, usually 30%. This is another issue which could dissuade domestic investors, including the developer/sponsor since post transfer to the REITtheywill haveto bear heavy income tax on the income received from the REIT units.
Fifth, there are certain regulatory hassles that may need to be creased out. For instance, REITs unlike InvITs cannot raise funds onaprivate placement basis, and mustmake a public offering. The Securities and Exchange Board of India (Sebi) regulations for REITs require the sponsor to have real estate experience. Typically, such eligibility criterion is only limited to the investment manager, and never to the sponsor who should only be seen as the anchor investor. As a result, several entities such as banks, airlines and other large organizations that have grade A fully tenanted commercial real estate cannot float their REIT and adopt the typical sale and lease back structures. Whilst such companies can club with someone with real estate experience to form a “sponsor group”, there may be some degree of challenge and financial contribution required since each sponsor is required to hold 5% of the REIT units.
Having said that, with all the challenges set out above, we still hope that REITs are well received on the back of shrinking credit rates, unflinching faith in the growth of Indian real estate and tax free exits on the bourses after a holding period of two years.
With90% incometobemandatorily up streamed and government allowing banks, insurance companies and pension funds allowed to invest in REITs, it remains to be seen if REITs are able to kick start monetisation of stabilised assets on the back of right mix of security, liquidity and tax optimisation.
Retail rents for the mostexpensivelocationsinshopping centres remainedrelatively stable in 1Q17, withtheaggregate Asia-Pacific retail rental index edging up by 0.4% q-o-q. Of the 18 featuredmarkets, almostallmarkets – including most sub-markets of Indian cities – recorded flat rents. Marginalappreciation of 0.5-1.5% q-o-q was recorded in select sub-marketsofDelhi-NCR and Mumbai.
Of the four Indian cities featured in the APAC study, Mumbai, Delhi and Bengaluru, figure among the top-15 markets while Chennaisitsoutsideofthetop-15. Rentals of prime south areas were considered for both Mumbai and Delhi while prime city rents weretakenintoaccountfor both Bengaluru and Chennai.
The dichotomy seen in Indian retail rents continued in 1Q17, with high quality shopping centres outperformingtheiraverage counterparts.
Other global retailers such as H&M, GapandMarks& Spencer continue to remain in expansion mode, enticed by the country’s strong long-term prospects. Going forward, single-brand retailers (mainly fast fashion) and F&B operators are expected to bethe maindrivers of demand in the country’s retail markets.
Another trend over recent yearsinIndiahasbeenthechangingpreferenceofseveralretailers towards the revenue sharing model instead of the older fixedrent model. Revenue sharing models typically followed by malls place different retailer categories in different brackets, for e.g., 12-25% for F&B tenants; 9-18% for vanilla spaces; 7-9% for anchor tenants; 3.5-4.5% for hypermarkets and 3-3.5% for electronics’ retailers.
Rents considered here are average net face rents for prime level locations in the best prime shopping centres and on a net leasable areabasis. Netfacerents are calculated excluding the tenant outgoing costs and landlord incentives are not taken into account.
Real estate investment trusts are set to help companies raise more funds