Embassy Parks, a joint venture between the US-based private equity company Blackstone and Bengaluru-based real estate company Embassy Group, is wary of the fate of its estimated Rs 5,000-crore REIT listing. Even though the company was one of the first to announce REIT plans, it is re-thinking the issue due to the DDT (dividend distribution tax) regulation.
“We are sitting on the fence at the moment, preparing for the launch of REIT in six months, if the DDT is exempted,” said Jitu Virwani, chairman of the Embassy Group. Virwani said that without the DDT exemption, the REIT structure will not be competitive.
He denied rumors that an alternate IPO is in the works. Embassy had filed a DRHP (draft red herring prospectus) to raise Rs 2,400 crore through an IPO in 2010, but later put off the plan due to tough market conditions. Whether or not the company hold back its REIT plans remains to be seen.
Embassy Parks has accumulated 30 million sq ft of office buildings as its portfolio that it planned to list as one of the country’s first REIT issues, Virwani confirmed.
Blackstone has been on an aggressive acquisition drive for last two to three years preparing for an impending REIT.
Its acquistion included marquee assets such as DLF Ackruti IT Park in Pune, Oxygen in Noida and recently, 247 Business Park in Mumbai, which are all a part of the REIT.
However, people familiar with the negotiations between the anchor investors and prospective REIT listed companies say that foreign investors are not keen on investing in REITs that offer less than 8% return. Virwani confirmed the return expectation, saying it is probable the rate of return for the first REIT will be in the range of 6-8%.
Since the government has agreed to do away with the levy of MAT (minimum alternative tax) on REITs, experts are divided on the existing regulation over DDT.
While some feel a DDT liability will adversely affect the post-tax returns of investors, forcing them to consider investing in Singapore and Hong Kong REITs instead, others say, REITs have to be structured in a way that minimises the implication of DDT.
“I don’t think DDT should be such an issue, given that companies can create debt-heavy SPVs and repatriate the interest income to investors via coupons, which will trigger a pass-through status as far as DDT is concerned,” said Rajeev Bairathi, executive director, capital markets and north at Knight Frank India.
Others, however, say capital structure of a SPV cannot be altered so easily. “The SPVs already have an existing debt ratio. In cases where companies are still making new acquisitions, it will be easier to engineer the debt component,” said Gautam Mehra, partner (tax and regulatory) at PwC India.
While Embassy Parks is on a wait-and-watch mode as far as REIT listing is concerned, the country’s largest company by market capitalisation, DLF, said it is committed to listing one of its REITs in the current fiscal.
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