Re­tail rents for most shop­ping hubs re­main sta­ble in first quar­ter

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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

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