Despite removing hurdles, developers and PE players are sceptic about REITs

MUMBAI | BENGALURU: Despite removing key hurdles and ironing out the process of listing Real Estate Investment Trusts (REITs) in India, realty developers and private equity players are yet to step forward to list their portfolios.

With the removal of Dividend Distribution Tax (DDT) through a proposal in the Union Budget 2016-17, REITs were expected to kick off in India. The move was expected to offer commercial developers a liquidity option and retail investors a chance to participate in office realty market’s growth. However, capital market regulator Securities & Exchange Board of India (Sebi) has not received any application for listing of REITs so far.

“We have come out with amendments on REIT regulations to bring more clarity and make it more acceptable, but as of now, we haven’t received any applications for REITs. Whatever Sebi could do has already been done, in terms of removing key roadblocks such as capital gains tax and DDT, and now we are looking forward to applications for REITs so that the REIT market can take off,” said Barnali Mukherjee, chief general manager of Sebi, while addressing a recent conference in Bengaluru.

Indian commercial real estate offers investment opportunity worth $43-$54 billion across top eight cities, including Mumbai, Delhi-National Capital Region, Bengaluru and Pune through REIT-eligible ready stocks, showed a report by RICS and Cush man & Wakefield.

“One of the reasons for REITs not taking off is that target investors -insurance companies and pension funds -still find more merit in investing in Gsecs and other stabilised yield products, which offer around same yield as a REIT, but with a substantially lower risk profile. Hence, investors are not very excited,” said Ruchir Sinha, co-head, Private Equity and M&A, Nishith Desai Associates.

Realty developers with large commercial portfolios also believe that the stage is almost set, and only a few issues need to be tweaked.

“Authorities have taken all positive steps to make REITs a reality. However, there are a few issues that need to be addressed in terms of treating REITs similar to listed entities and allowing exchange of assets with units of REIT without incidence of capital gain tax. We are hopeful that the government will address these issues. We are optimistic of REITs taking off soon,” said Vinod Rohira, MD –Commercial Real Estate and REITs, K Raheja Corp, which is seen as a candidate for REIT listing with its 20 million sq ft commercial portfolio.

Real Estate Investment Trust is an entity that uses a pooled capital of investors to buy, hold and manage income-producing properties. Developers with REITable office properties are optimistic that few more changes will take place soon and they will be able to list their portfolios.

“We are continuing to build and grow our portfolio, and looking at REIT in a careful manner. It may take a little more time but we are optimistic about it…Some developers may be looking at higher proportion of investment into development of assets, but that’s a small tweak needed,” said Mike Holland, CEO of Embassy Office Parks, a joint venture between Embassy Group and Blackstone Group. Embassy Office Parks has portfolio of total 30 million sq ft entirely leased commercial properties.

A REIT is required to invest at least 80% of its assets in completed and income-generating properties. A maximum of its 10% remaining assets can be invested in developmental properties and the rest in permissible securities such as government securities.

“Authorities have done a great job on the consultation process with industry players in the last 18-24 months, and now we are in the last mile before REITs may take off,” said Holland.

Interestingly, availability of long-term capital is also acting as a hurdle for REITs to take off.

“Most builders who do not have partners will tie up with pension funds as there’s a lot of new capital waiting to be invested in core assets. REIT will take some time, especially on the business rationale. There is a short-term compulsion among builders to get liquidity. Many builders may tie up with funds than opting for a REIT listing,” Arshdeep Sethi, MD -Development of RMZ Corp.

REITs at this stage need to take off with institutional support, hence the requirement of 200 offers could be done away with, reckons Ruchir Sharma. “Let a privately-placed REIT take off first and be successful that could lead to public interest and is success in the public markets,” he said.

RICS-Cushman & Wakefield report estimates that around 315 million sq ft of office inventory is eligible for REIT across the cities. The REIT-eligible inventory includes existing nonstrata sold Grade A inventory, wherein Bengaluru, Mumbai and Delhi-NCR cumulatively account for over 67%.

The report shows the value of REIT-eligible stock is the highest in Bengaluru at $15.8 billion, primarily due to the high volume of investible grade developments.

Credits ET Realty

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