Clarity on REIT, AIF change put realty on a high

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Published: March 1, 2015 12:05:24 AM

Finance minister Arun Jaitley provided much-awaited clarity on how REITs or real estate investment...

Realty sector, propertyEmbassy Office Parks is expected to list India’s first REIT in the second half of 2016 in a bid to raise Rs 5,000 crore.

Finance minister Arun Jaitley provided much-awaited clarity on how REITs or real estate investment trusts will be taxed during his annual Budget speech, paving the way for such investment instruments to be finally launched.

In line with industry expectations, he scrapped the capital gains tax for sponsors of REITs, “subject to payment of Securities Transaction Tax”.
Jaitley also said rental income arising from real estate assets owned by the sponsors of REITs (the real estate companies or private equity funds seeking to raise money) will be taxed in the hands of the unit holders of these trusts. “Our understanding is that capital gains tax has been done away with and STT (Securities Transaction Tax) will be applicable instead of DDT (Dividend Distribution Tax), but we are yet to read the fine print,” said Mike Holland, chief executive of Embassy Office Parks, a joint venture between Embassy Group and PE firm Blackstone.

Embassy Office Parks is expected to list India’s first REIT in the second half of 2016 in a bid to raise R5,000 crore. The country’s largest real estate company by market value, DLF has also announced that it will list its nearly 30 million sq ft of commercial portfolio through an REIT.

“The exemptions announced in the Budget will definitely enhance the attractiveness of India as a REIT market and make it competitive with international markets,” said Neeraj Sharma, partner at Walker Chandiok & Co.

What also bodes well for the real estate sector is a slew of measures that were announced to encourage foreign investments in alternate investment funds, or AIFs. A lot of PE funds are looking to invest in Indian real estate through these vehicles. The government has given a tax pass-through status to AIFs, which means that returns from these funds would be taxable at the hands of the investors.

Moreover, for the first time, foreign investment has been permitted in AIFs. “This enhances a private equity’s capability to tap international money and significantly improves ease of doing business in India,” said S Sriniwasan, chief executive of Kotak Realty Fund.

However, experts say the Budget otherwise did not do enough to boost demand in the housing sector. “The Budget did not provide relief via an increase in income deduction limit or on repayment of housing loans; this is a disappointment,” said Anuj Puri, chairman and country head of JLL India.

“It is disappointing that real estate has not been considered as part of infrastructure or given industry status,” said JC Sharma, managing director, Sobha Developers. Awarding infrastructure status would reduce cost of capital for real estate companies.

“Availability of low-cost capital is a key enabler for the real estate sector. The sector has a high multiplier effect on the economy and affordable housing is key to realising the social dream of housing for all,” said Gagan Banga, vice-chairman and managing director, Indiabulls Housing Finance. The finance minister said the target is to build six crore houses by 2022. As per experts, this will provide a thrust to low-cost housing projects.

Additionally, in an attempt to reduce the play of black money in real estate, the finance minister proposed amendments to the Income Tax Act, which prohibits acceptance of payment or loan repayments in cash beyond R20,000 for the purchase of immovable property. “This measure will arrest speculative transactions, especially in land deals, over a period of time and, hopefully, rationalise land prices,” said Anshuman Magazine, chairman and MD, CBRE (south Asia).

Storey by Storey

* Clarity on taxation in REITs paves way for launch
* Capital gains tax for sponsors of REITs scrapped
* Measures announced to encourage foreign investments in alternate investment funds
* To reduce play of black money in real estate, amendments to Income Tax Act proposed

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