Realty sector welcomes REIT norms, seeks clarification on concerns
Real estate experts have welcomed the Securities and Exchange Board of India's (SEBI) decision to peg the size of commercial real estate asset for real estate investment trusts (REIT) at Rs.500 crore.
However, they have expressed the need to have better clarity on various issues.
The SEBI had Sunday cleared the norms for REITs and infrastructure investment trusts (InvIT) which would enable their listing in the stock exchanges.
As per SEBI regulations, REITs would invest in commercial real estate assets directly or through special purpose vehicles (SPV) and will have majority stake in these.
The REIT would raise funds through an initial public offer (IPO) and later through follow-on offers, rights issue, qualified institutional placements and others.
The minimum subscription size for units of REIT shall be Rs 200,000. The units offered to the public in initial offer shall not be less than 25 percent of the number of units of the REIT on post-issue basis.
Units of REITs shall be listed in stock exchanges and trading lot for such units will be Rs.100,000.
According to SEBI, for coming out with an initial offer, the value of the assets owned/proposed to be owned by REIT shall be of value not less than Rs 500 crore. Further, the minimum issue size for initial offer shall be Rs 250 crore.
Reacting to the development Anshuman Magazine, chairman and managing director at CBRE South Asia said: "This move is a positive signal for India's capital markets as a whole, and the realty sector in particular."
"With the stamp of approval by SEBI, REITs are finally a formalised concept. This is a big change from the ambiguity and uncertainty that prevailed about this very important instrument in previous years. It is gratifying to note that SEBI fully intends to deliver on its assurances of bringing better and faster funding into Indian real estate," Anuj Puri, chairman and country head, Jones Lang LaSalle (JLL) told IANS.
Reducing the minimum commercial real estate asset sizes from Rs.1,000 crore to Rs.500 crore for listing REITs in India is likely to generate more income through this new funding channel and encourage many mid-sized development firms to consider this avenue, according to Magazine.
A similar view was expressed by a senior official of a leading real estate consultancy firm.
"The reduction in asset size by Rs.500 crore by SEBI from it earlier proposal of Rs.1,000 crore will double the number of players," the official told IANS preferring anonymity.
He said: "The issue of dividend distribution tax is also there for REITs to take off. A return of 8-9 percent is not sufficient for REITs to take off in India as it is new and has risks."
According to JLL's Puri, as the drafts for REITs stands now, further clarity about taxation eligibility norms is definitely required, and will doubtlessly come before the first listing goes up. When this happens, there will be vastly increased interest from foreign investors.
"Although the government has already clarified that India REITs will be given 'pass through taxation status', clarifying the tax structure is of high importance at the moment," CBRE's Magazine said.
According to CBRE, for REITs to be successful clear regulatory framework with an enforceable implementation schedule is important.
"In the Philippines, the REIT Law took effect in 2009 but no REITs have been launched as various regulatory bodies are still drawing up rules around implementation," CBRE in its note has said.
According to CBRE, Indian developers preferring ownership and stable income returns will hold on to quality assets rather than sell them to REITS, thereby preventing core and stabilised properties from entering the Indian REIT market.
Further international institutional investors generally have mandates to invest only in developed markets. Even if they are permitted to invest in emerging markets, there exist regulatory restrictions on foreign stock ownership in India, in addition to limitations on foreign direct property ownership, CBRE said.
Foreign investors seeking income streams that could be provided by Indian REITs may therefore be unable to get into the market.
"As a workaround, I-REITs or trusts packaged with Indian properties could list in developed markets such as Singapore in order to increase their accessibility to foreign institutional investors, although challenges related to the remittance of funds would Remain," CBRE said.
Union Finance Minister Arun Jaitley in his budget speech said REITs have been successfully used in several countries for pooling of investments.
He said REITs would be granted necessary tax incentives.
"Currently, Grade A office space in the top seven cities of India amounts to around 376 million square feet, and we anticipate that approximately 50 percent of this space will get listed in next 2-3 years," JLL's Puri said.
The valuation of these assets is around USD 10-12 billion, and this accounts for a fairly massive influx of funding waiting in the wings to hit the Indian real estate market via REITs over the next few years, he said.
In order to kick start the economy, the government is keen to attract investments into infrastructure and construction sectors.
Through InvITs, the government aims to raise funds to meet infrastructure investment requirements of Rs.65 lakh crore for the 12th Five Year Plan (2012-17).
The new guidelines would allow listing and trading of REITs and InvITs on the stock exchanges.
(Posted on 11-08-2014)