Embassy Office Parks, the joint venture between Blackstone and Embassy Developers, might be India’s first real estate investment trust (REIT), several industry experts told FE.
“Among other participants, Blackstone-Embassy and DLF seem to be ahead of others in terms of preparedness,” said one person who did not wish to be named.
The joint venture between Blackstone and Embassy was formed three years back when Sebi first started a dialogue regarding monetising income generating assets through REITs.
This follows the proposed changes to the tax rules relating to REITs. The new norms will allow distributions made by an SPV (Special Purpose Vehicle) to a business trust be exempt from Dividend Distribution Tax (DDT). Moreover, the dividend received by the business trust and its investor shall not be taxable in the hands of the trust or the investors. The existing tax regime provides that the income by way of interest paid by an SPV to a REIT is not taxed at the level of the REIT but in the hands of the respective investors of the REIT. If the SPV is a company, it pays corporate tax and thereafter when the income is distributed to the REIT, it pays DDT.
DLF, the country’s largest real estate company by market capitalisation also quickly outlined its plan to raise funds through this channel. Both these entities, that experts are now touting as the first movers for REIT issuance, together hold close to 60 million sq ft of commercial projects. While Embassy Business Parks has projects mainly based in Bangalore, DLF’s main location is the National Capital Region (NCR).
According to sources familiar with the development, both these companies are looking to raise nearly R10,000 crore through their respective issues. It is yet unclear what capitalisation rates will finally materialise although it is believed an 8% yield is what bankers are pitching for.
According to some fund managers, current deals in Grade-A commercial assets are being negotiated at 9.5%. In a conference call during the announcement of quarterly results, DLF said that it wants to float two separate REITs, one for retail and one for office assets. The company is believed to have appointed JPMorgan and Morgan Stanley for assisting the company in this process.
To be sure, the first REIT is not expected before 10 months despite the fact that policy-wise all roadblocks have been cleared. Companies will now begin to work on regulatory compliances, capital structure, road shows etc which will take time.
Anish Sanghvi, partner at PwC said, the first one will be crucial and will take maximum time and once the process is streamlined, others will seamlessly follow. Apart from the two companies mentioned, a joint venture between RMZ and QIA and K Raheja Corporation are the two companies that are also actively working on their respective REIT debuts.
A back of the envelope calculation revealed that the top four companies/joint ventures that have articulated plans for a REIT listing could be looking to monetize close to 100 million sq ft. Obviously, the total volume of opportunity is unprecedented.
Meanwhile, a rush of interest from global funds to invest in Grade A income generating assets drove down yield rates of such assets from 10.75% to 9.5% last March on a year-on-year basis, according to a JPMorgan Chase report. FE independently verified yield rates in the current market and some companies indicated a further lowering, close to 8%.
Yield refers to the rental income earned by a PE fund as a proportion of its acquisition cost (of the commercial asset).
This means value of commercial properties is on the upsurge.
In sharp contrast to the housing sector, which is undergoing one of the worst slumps seen since 2009, the commercial piece rapidly revived in 2015. Various estimates released by property consulting firms revealed that last year, office absorption was definitely in excess of 30 million sq ft, a high when compared to the previous four years.