According to a report on real estate investment trusts (REITs) released by Knight Frank, the domestic environment is ripe for listing of REITs, an investment vehicle that invests in rent-yielding completed real estate projects. While capital market regulator SEBI had notified REIT regulations in 2014, no single trust has been set up so far, as investors have been seeking further easing of the norms, as well as various tax breaks, to make these instruments more attractive.
The government has brought amendments in the IT Act to provide a tax efficient and stable regime for REITs in India, while SEBI had also eased up REITs norms in December, 2016. “Amidst the conducive environment of liberalised REIT regulations, clear guidelines on disclosures and governance of REITs, the demonetisation decision of the government of India has only accentuated the cause of REITs,” Knight Frank’s chief economist and national director, Samantak Das said.
Das noted that the demonetisation of high value currency notes, has pushed up the liquidity in the banks, which has further led to a considerable fall in government bond yields. “From the REIT perspective, the decline in government bond yields and the overall interest rate regime, has increased the spread with prime office properties. This has also led to the compression of capitalisation rate for prime office assets that are perfect candidates for REITs and this compression has led to the upward revaluation of office property in prime markets like BKC in Mumbai, making REIT listing more attractive,” he added, expressing optimism that REITs would come up in 12-14 months.
According to the report, while majority of issues restricting the launch of REITs have been addressed through changes in the tax and regulatory regime, there still exist some key demands on taxation. Among others, these include exemption from dividend distribution tax paid by special purpose vehicles (SPV) to the holding company and holding company to REITs and similarly, exemption from withholding tax on interest paid.
“The government also ought to consider waiving the stamp duty, where a REIT holds property over a specified period of years or, alternatively, the state governments could consider a one-time waiver of stamp duty on transfer of assets to REITs,” the report said. “If the sponsor seeks to consider an alternative route (other than SPV model) to hold the REIT assets, this may not be feasible for REITs in India, due to high state stamp duties and registration costs, applicable on acquisition of properties,” it added.
Going by the report, REIT, as an investment vehicle, has a huge opportunity in India as the country has a rent yielding office inventory to the tune of 537 million sq ft, valued in excess of USD 70 billion. Besides, there are other properties like warehouses, retail malls, shopping centers and school buildings, which hold huge potential REITs, the report said.