 "Explained: What REITs will offer retail investors")
The securities and Exchange Board of India (Sebi) has approved the much awaited Real estate investment trust (REITs) regulations. Based on the global experience on REITs, this could be the much awaited gift to retail investors in the Indian securities market.
Every common man dreams of investingin real estate. However, investors have been facing multiple hurdles like prerequisite of huge capital accompanied with high cost of capital, the hassle of managing property, uncertainty of income, rigid exit formalities, taxation issues etc. The new REIT regulations address each of the above concerns. In fact, it opens up a new investment opportunity in commercial real estate which yields higher returnsthan residential properties.
Under REIT regulations, the retail investors can invest as low as Rs 2 lakhand get a share of the real estate play. Compulsory listing of REIT units offers the desired liquidity to retail investors.
Apart from liquidity of capital, the requirement of majority of investment by REITs in yield earning assets coupled with the necessity of distribution of income to unit holders provides recurring cash flows to investors.
The corporate governance framework envisaged under REIT safeguards the investment of retail investors since each constituent of REIT has a defined role which is as follows:
a) owners of real estate asset to incorporate the REIT structure and be invested in REIT for a specified period and appoint trustee,
b) trustee to act as watchdog i.e. to oversee the activities of REITs independently,
c) managers to be responsible for operations of REITs,
d) principal valuer to ensure fair and transparent valuation of underlying assets.
The regulations also provide increased financial transparency in thereal estate sector on account of corporate governance, and regular disclosure requirements like six monthly valuation of assets by principal valuer, detailed disclosures in annual and half-yearly valuation reports, event based disclosure requirements etc.
On the taxation front the gains on sale is taxed similar to taxation on sale of listed shares except that units in REIT would qualify as long term capital asset if held for more than 36 months.
The special tax regime introduced for REIT by the finance minister in Finance Act 2014 ensures a single time taxation of income earned from REIT assets. However, where REIT has to hold assets through a special purpose vehicle (SPV)there could have been instances of double taxation in the form of income tax and DDT at SPV level. Income in the form of interest is subject to tax in the hands of unit holders.
REIT as a concept could be a game changer for all stake holders like retail investors, developers/real estate owners and the economy as a whole. REIT could provide the much awaited relief for the funding starved real estate sector by providing capital inflow from overseas markets in India. REIT provides avenues for retail investors to not only invest in big ticket real estate investment but also permits investment in low risk, completed, revenue generating projects as against high risk, non-revenue generating, developing projects whereas for developers/real estate owners it may provide the required avenue to exit a project and fund new project/repay the high cost debt taken.
Globally REIT offers a return in the range of 6% to 9% to the investors. REIT is a success in developed countries wherein the return to investors on bank fixed deposits or in Government securities/bonds is much lower, say 3% to 5%, however, in the Indian context generally bank fixed deposits and Government securities/bonds offer a return in range of 7% to 8%. Investing in REIT may not be as lucrative unless the investor looks at an upside in value of commercial property over a period of time.
The success of REIT in India could depend on some key factors like enforcement of investor protection norms, fewer hurdles in terms of regulatory approvals, meeting the expectations of investors by providing higher and stable yield as compared to returns from instruments like government securities/bonds etc.
The author is- Senior Director and Venkatesh K - Manager, Deloitte, India.
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