Dividend cloud over INVIT, REIT issues ISSUES THAT MATTER

The change in dividend distribution tax (DDT) rules in the Budget has made real estate investment trusts (REITS) and infrastructure investment trusts (Invits) less attractive to investors. This could hit the plans of issuers planning to raise funds from the market.

The new DDT rules make recipients add dividends to their total income and pay tax at the marginal rate. Brookfield and Reliance Industries’ Tower Infrastructure Trust along with K Raheja Corp’s Mindspace Business Park REIT are planning to raise funds by listing their investment vehicles in the immediate future.

“It may not make any sense to float a REIT or an INVIT now with the instrument becoming unattractive as the dividend will now attract tax at the hands of unit holders,” said an investment banker. It will also impact domestic investors of existing REITS and Invits as the dividend treatment will change from FY21. “This will certainly hit the existing Invits and REITS and impact forthcoming issues, as it is a dividend play for the investors. Unlike in shares, where there is capital appreciation and dividend for the investors, in INVITS/REITS an investor primarily expects dividend yield. By taxing these instruments, the attractiveness reduces much more if the investor is in a high tax bracket.

The move to tax dividends is surprising considering the need to unlock liquidity in real estate and infrastructure assets,” said Ketan Dalal, managing partner of Katalyst Advisors. To address their concerns, officials of REITS and Invits are seeking a meeting with finance minister Nirmala Sitharaman in the coming days. “The government has received representation from the industry on tax anomalies in Invits and REITS and we are looking into it,” said revenue secretary AB Pandey on Tuesday.

At present, distribution of dividend by a domestic company is subject to DDT levied on the distributing company at an effective rate of 20.56 per cent (including surcharge and cess). In order to change the

Issue size(~ cr)# Tower Infrastructure Trust

Mindspace Business Parks REIT

Issue size (~ cr)# IRB INVIT Fund

Embassy Office Parks REIT

Indinfravit Trust

Oriental Infratrust

India Grid Trust incidence of taxation from the company, mutual fund or investment trust to the shareholders/unitholders, the Finance Bill proposes to abolish the DDT regime.

Under the proposal, dividends will now be directly taxed in the hands of shareholders/unit holders and the company/mutual fund would be required to withhold applicable tax on them, proposed at 10 per cent for residents and 20 per cent for non-residents.

Till now, REITS and Invits were considered as tax efficient vehicles as they distribute 90 per cent of profits as dividends to their unitholders.

“Normally, it’s the high net worth individuals who invested in REITS and Invits as dividends are tax free. Why would they invest now?” asked a senior executive of a Bengaluru-based developer who did not want to be quoted. Real estate developers were planning to raise as much as $25 billion over the next three years by listing their rent-yielding commercial properties through the REIT route, according to

Anarock Property Consultants.

“The step will project an unstable picture of India as an investment destination, especially in the real estate and infrastructure space which are at this point of time reeling from pressure. There are chances that the investments may be diverted elsewhere,” said Sigrid Zialcita, chief executive of Asia Pacific Real Estate Association. This will have a long-term impact on investments in REITS/INVITS, Zialcita added. Brookfield declined to comment. Also, Blackstone and K Raheja Corp did not comment.

Earlier, Blackstone’s joint venture with Embassy Office Parks had raised ~4,750 crore through a REIT issue in early 2019. There are four listed Invits sponsored by IRB Infrastructure, L&T Infrastructure Development Projects, Oriental Structural Engineers, and Sterlite Power Grid Ventures each. In December, Mindspace Business Parks REIT, sponsored by K Raheja Corp, had filed a draft offer document for the public issue of its REIT.