Securities and Exchange Board of India (SEBI) has issued final guidelines for REITs and Infra Investment Trusts (InvITs) to be listed in India . Apart from providing clarity on the tax front, the new guidelines have been made less stringent and hence become a viable option for small developers. With these new norms, the cash-strapped Indian realty sector is likely to see inflows worth Rs 1 lakh crore fund inflows from foreign and domestic investors.
REITs are listed entities which mainly invest in income-producing real estate assets. The earnings generated are mostly distributed to their shareholders. They generally get special tax treatment.
Key changes
In a bid to make REITs attractive, the capital market regular has incorporated industry suggestions and halved the minimum asset size to Rs 500 crores from Rs 1,000 crore proposed earlier. With this, the developer will have access to more assets that could be eligible for REIT listing. While listing, the size of initial offering should be atleast Rs 250 crore and free float of atleast 25 percent is mandatory in the initial offering.
Smaller players who don't have enough rental assets to launch even Rs 500 crore REIT can float a combined REIT with multiple sponsors subject to maximum of three. Each sponsor should hold at least 5 percent of the units and overall at least 25 percent of the units.
To check volatility in valuation of asset, SEBI says that no REIT can invest in more than 10 percent in properties under construction projects. REITs will be allowed to invest only in commercial properties.
Clarity on taxation on REITs has been the biggest worry for the real estate industry ever since Finance Minister Arun Jaitley cleared the way for REITs and infrastructure trusts by announcing tax benefits for both, in his maiden Budget last month. Allaying those concerns, SEBI has said that REITs will be taxed only when projects are sold or investment is monetized.
Also, when a special purpose vehicle (SPV) is transferred to the REIT, tax will be deferred as mentioned in Finance Bill. SPV is a legal entity created solely to serve a particular function; in most cases it is formed to raise funds from the market.
SEBI has allowed foreign investments in REITs, this will attract pension funds and insurance companies, which have proved as catalysts for REITs markets globally. Although for retail investors, the minimum investment limit has been left unchanged at 2 lakhs.
Industry lauds Sebi
Tweaking of minimum asset size and allowing foreign investment in REITs are two most noteworthy guidelines, KPMG and real estate services major Jones Lang LaSaelle India (JLL) feel. REITs are expected to garner USD 8-10 billion over the next five years.
According to brokerage firm JP Morgan, the total size of existing grade A commercial office/ retail market in India in around USD 50 billion and growing at 12-14 percent rate. Even if a fraction of this gets monetized, the regulations would have served their purpose, it adds.
Large listed property developers like DLF , IBREL , Phoenix Mills and Prestige Estates are likely to be key beneficiaries of these norms.
Some questions still unanswered
While this step will be short in the arm for the sector and could free up some liquidity for real estate and infrastructure players, one key thing that remains to be seen if REITs would be allowed to invest in LLPs, PwC says.
Aashiesh Agarwaal CFA, real estate analyst at Edelweiss Financial Services tells CNBC-TV18 that applicability of minimum alternate tax (MAT) remains to be a problem for REITs. "The capital gains tax has been deferred for a developer when he is transferring his assets to a REIT, when he is getting units in lieu of his assets, but still there is a minimum alternate tax (MAT) that is likely applicable on this transfer, which is going to be a problem when developers are trying to take out their REIT. This can be a significant road block," he adds.
Also, he expects the market watchdog to impose transfer pricing restriction later on as the assets appreciate in value.
Meanwhile, the tax treatment notification for REITs, InvITs is likely by October 1.
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