Booster shot for real estate investment trusts
- 1. Booster Shot For Real Estate Investment Trusts All decks are being cleared to allow foreign investment in the cash- starved Indian real estate sector. The Finance Ministry has floated a draft cabinet note to amend the Foreign Exchange Management Act (FEMA) to permit overseas funds in real estate investment trusts (REITs). At present, foreign investment in real estate assets, specifically completed commercial real estate properties, whether rent yielding or not, is not permitted under FEMA. Finance minister Arun Jaitley had announced REITS and infrastructure investment trusts in his budget last year in July enable developers and banks to reduce their debt. Subsequently, the Securities & Exchange Board of India (Sebi), the market regulator, notified REIT regulations in September and unveiled a framework to set up REITs. Provisions in FEMA, however, prevented the operationalization of the new structure, which has been used successfully in several countries. How will REITs help real estate funding? REITs pool capital from investors to purchase and manage income-yielding real estate assets or mortgage loans and can be traded on major stock exchanges like normal stocks. REITs are expected to attract big-ticket funds to the real estate sector and help make it more efficient and transparent. These instruments would also enable banks to free up their balance sheet by reducing loan exposures and creating head room to finance fresh projects. The formation of REITs will encourage the creation of big-ticket institutional-grade buildings, and will give developers a ready outlet for development projects. Indian REITs, like many others around the world, will be required to pay out 90 percent of their income from stable assets to investors. That will result in a twice- yearly dividend. It makes REITs perfect “widows and orphans” stocks since they spin off cash regularly and are relatively low-risk. Only 20 percent of an Indian REIT’s assets can be invested in development, the
- 2. riskiest end of the real-estate industry or in cash and cash equivalents for liquidity management, with a maximum of 10 percent for the former. The remaining 80 percent of the fund’s assets must be invested in income-producing property. Since those projects – often office buildings or shopping malls – have already been developed and already have tenants, their income stream is relatively easy to predict. While they may increase in value, the REIT will hold them long-term and won’t trade in and out of real estate. According to experts, REITs could provide a positive push to the Indian capital markets and real estate and infrastructure sectors. It could also create liquidity to some extent for real estate and infrastructure players. “REITs will be a booster rocket for investments into the country, and I will be holding my breath for much-anticipated announcement (regarding REITs) during Finance Minister Arun Jaitley’s speech next month,” said Anuj Puri, Chairman and Country Head, Jones Lang LaSalle India. Budget announcements expected to push REITs Finance minister Arun Jaitley, in his budget next month, is expected to announce a slew of measures to make REITs the growth drivers for the fast-expanding commercial real estate sector. He is likely to rework the three-year lock-in for investments in REITs to avail exemption from capital gains tax, and bring them on par with listed securities. Investments in securities are currently exempt from capital gains tax after one year. There is also a possibility of completely exempting REITs from payment of minimum alternate tax (MAT) that’s applicable to all companies. The Reserve Bank of India (RBI) Governor Raghuram Rajan, in his financial stability report shared with Finance Secretary Rajiv Mehrishi, has also favoured giving a big push to REITs that are very popular as investment instruments across Europe. A CBRE South Asia note has projected that in case the REITs are made more attractive in terms of reducing tax liabilities, India has the potential to attract about $20 billion to such trusts in the near term. Meanwhile, Private equity (PE) firm Blackstone and its local partner, Bangalore- based realty developer Embassy Group, are targeting to list India’s first REIT in the second quarter of FY16 and raise approximately Rs 5,000 crore. Real estate sector experts are looking forward to the first REIT listing as it will serve as a reference point for others to follow, especially at a time when commercial real estate transactions are expected to pick up in wake of an anticipated upswing in the economic activity. According to experts, the initial lot may face a lot of challenges while entering the segment. “Listing of new REITs will be slow and steady. While REITs will succeed over the longer term, they need to pass through the challenging phase ahead for them over the next two years,” said Anuj Puri of Jones Lang LaSalle India. Source: CommonFloor.com
- 3. For Latest Updates on Real Estate Updates, Property News and Cities Infrastructure Developments Visit: http://www.commonfloor.com/guide Copyright©2007-14 CommonFloor.com.All rights reserved.