With the fineprint yet to be figured out, estimates that $10 billion or more of foreign funds could flow into Real Estate Investment Trusts (REITs) over the next few years appear somewhat far-fetched at this juncture. To be sure, there could be a thriving market in
REITs one day but given that the real estate sector in India suffers from the lack of reliable data and given that there is no tax holiday right now, that could be some time away. Moreover, the fact that the final guidelines put out by the Securities and Exchange Board of India (Sebi) allow for REITs only in commercial real estate, many believe, make the opportunity less attractive; the real play, they say, is in the residential property space. Analysts point out that excluding a few deals in the trough of 2010-11, most
pre-let commercial property acquisitions took place at high single-digit or low double-digit yields, whereas the cost of borrowing is around 11.5%.
Nevertheless, throwing open the space to a large number of participants?the asset size for a REIT that wants to float an initial offer has been halved to R500 crore from the originally envisaged R1,000 crore?is a good idea, as it is to leave the minimum size for subscriptions at just R2 lakh. Given the reputation the real estate sector has, it is not surprising that Sebi has put in a number of safeguards to make REITs accountable. For instance, if they opt for the special purpose vehicle (SPV) route, REITs must hold at least 50% in the SPV and the SPV cannot invest in other SPVs. Moreover, sponsors must continue to hold a 15% stake throughout the life of the REIT. Sebi has also tried to de-risk the instrument, stipulating that a REIT must invest in at least 2 projects with not more than 60% of the value of assets invested in one.
Some players are miffed that the capital gains tax, on the transfer of interest in an SPV to a REIT, in lieu of units, hasn?t been withdrawn but simply deferred until the sponsor monetises the investment; many had been hoping for a one-time exemption. Also, there hasn?t been a complete pass-through on the dividend distribution tax; while there is a pass-through on distribution tax when a REIT pays dividends to unit holders, the SPV that owns the project is subject to corporate tax and the dividend paid by the SPV to the REIT is also subject to DDT. Also, unless states lower stamp duty, that could be a big cost. While there could be a couple of banner products out in the market, investors may not have too much choice in the near-term.