It is time real estate investment trusts (Reits), investment vehicles akin to a mutual fund, took off. They now have a tax regime that suits their requirements. Timely launch will boost returns for Reits, help developers saddled with debt, offload inventory and reduce bad loans on the banks’ books. Typically, Reits own commercial properties such as apartment complexes, shopping malls, hotels, office buildings. Rentals from properties owned and managed by them form a substantial slice of their revenues. Reits will also help finance the physical infrastructure of India’s rapid urbanisation.
The Blackstone Group and its partner Bangalore-based Embassy Group have reportedly hived off their portfolio of assets into a separate company, which would be the first step to unlock value through a listing. Sebi has already put in place a robust regulatory framework for Reits. A wait for market conditions to improve further to transfeer ownership to Reits could prove indefinite. The best time to get going is now.
Tax policy is conducive now for investment in Reits. This Budget scrapped the dividend distribution tax that business trusts have to pay when the asset-holding company, a special purpose vehicle, pays dividends. The case was compelling as Sebi rules mandate both the SPV and business trust to distribute 90% of their operating income to investors. Dividend income is tax-exempt in the hands of the unitholder. Interest income is also exempt from tax at the level of Reits, but not in the hands of investors. Rightly, these tax incentives open up opportunities for property developers to raise funds in the domestic markets, instead of listing such vehicles overseas. It also enables a wider set of investors to participate in and gain from the real estate boom.
Credits Economic Times