BENGALURU | NEW DELHI: With the finance minister providing taxation clarity on real estate investment trusts (REITs) in the budget on Saturday, a host of real estate players are expected to rush for REIT listings.
Major players such as DLF, Embassy-Blackstone, RMZ Corp, Kotak Realty Fund and Red Fort Capital, who have built-up rental assets over the years will now firm plans after Jaitley addressed the confusion with regards to tax treatment at the time of initial listing, the pass-through status and the trading of REIT units by the private equity investors. The budget has done away with capital gains tax issue for the sponsors and allows pass-through on rental income; however, the capital gains tax will be applicable for direct transfer of real estate to these trusts.
"For sponsors, tax on capital gains in case of REITs has been brought on par with an IPO which should encourage REITs. A real 'pass thru' status has been the focus of FM by providing an exemption to rental income earned directly by a REIT but the same will be effective only if transfer of asset to a REIT is also exempt (similar to shares of SPV)," Maadhav Poddar, tax director, EY.
There is around $10 billion worth of completed and leased commercial assets in the country that are expected to be monetised. The total supply of investment grade office space in India which would qualify for REITs is less than 30% of the total stock.
Listing commercial properties on REITs will allow builders to raise cheaper capital and also offer an opportunity for retail investors to participate in India's growing commercial realty market. REITs are vehicles for realty firms to sell down income producing assets in the market to investors and use the cash to invest in other projects.
In a recent analysts presentation, India's largest real estate developer DLF, that has 30 million sq ft of commercial assets, had shared a plan to list as a REIT to tactically monetise its portfolio to increase cash flows and reduce debt. "The groundwork on REITs is underway. Many strategic and financial investors for REITs are in touch with us. We will create 2 REIT platforms next year — one for office and other for retail; target first filing within fiscal year 2016," Ashok Tyagi, group CFO, DLF, had told analysts recently.
Others like, Embassy Office Parks, a joint venture between US private equity fund Blackstone and Embassy Group of Bangalore, has already begun the process of grouping all of its commercial properties in India to list them as a REIT. It plans to raise close to Rs 6,000 crore by selling about 50% to the public, aiming to double its office portfolio to 40 million sq ft by acquiring assets across cities like Delhi, Bangalore and Chennai.
"We will certainly look for REIT listing as the recent announcement will attract more foreign capital into income producing assets," says Mike Holland, CEO, Embassy Office Parks. Blackstone had recently acquired another 1.5 million sq ft of IT SEZ owned by real estate developer 3C Group for Rs 625 crore. This deal made Blackstone one of the biggest owners of commercial real estate in the country.
It now has 27 million sq ft of commercial space that is operational and 6 million sq ft under construction. Family-owned RMZ Corp is also increasing its commercial portfolio for REIT listing. RMZ along with Qatar Investment Authority, is looking at a portfolio of 20 million sq ft office space, worth Rs 3,000 crore. The company is looking to list its commercial assets this year or early next year.