What are Real Estate Investment Trusts and why do we need them badly in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Recently, Securities and Exchange Board of India (SEBI) has put up Real Estate Investment Trusts (REIT) for public comments in order to draft the final set of guidelines.

So, what are REITs and what benefits can they provide to small investors with 2-3 Lacs of invest-able income? Can these investors invest small amounts in REITs? We explore here.

A real estate investment trust is basically a creation of the internal revenue code. It is a real estate company or trust that has elected to qualify under certain tax provisions to become a pass-through entity that distributes to its shareholders substantially all of its earnings in addition to any capital gains generated from the sale or disposition of its properties. Because the individual investor has the opportunity to pool his/her resources with those of persons of like interests, funds are assembled to permit purchase of buildings, shopping centers, and land in whatever proportion seems to offer the most attractive returns. Investments must be approved and management activities reviewed by a board of trustees who are accountable to shareholders and are ordinarily well qualified to make such decisions.


Following are the requirements to qualify as trust in countries where REITs are in existence for years:

Asset requirements:

1. At least 75% of the value of a REIT’s assets must consist of real estate assets, cash, and government securities.
2. Not more than 5% of the value of the assets may consist of the securities of any one issuer if the securities are not includable under the 75% test.
3. A REIT may not hold more than 10% of the outstanding voting securities of any one issuer if those securities are not includable under the 75% test.
4. Not more than 20% of its assets can consist of stocks in taxable REIT subsidiaries.

Income requirements:

1. At least 95% of the entity’s gross income must be derived from dividends, interest, rents, or gains from the sale of certain assets.
2. Minimum of 75% of gross income must be generated from rents, interest on obligations secured by mortgages, gains from the sale of certain assets, or income attributable to investments in other REITs.

Distribution requirements:

1. Minimum of 90% of REIT taxable income must be distributed to shareholders.

Stock and ownership requirements:

1. Be taxable as a corporation
2. Board of directors or trustees should manage the REIT
3. Fully transferable shares
4. REIT shares must be transferable and must be held by a minimum of 100 persons

REITs that are not listed on an exchange or traded over the counter are generally called private REITs.



Various types of REITs:

Industrial/Office: 
These REITs are further subdivided into those that own industrial, office, or a mix of office and industrial properties. Some analysts further segregate these REITs by property location (i.e., whether they are in CBD or suburban locations). For example, if REITs were to become reality in India, the REIT with focus on Office Space in Gurgaon can result in attractive returns for investors.

Retail:
These REITs are further subdivided into those that own strip centers, regional malls, outlet centers, and free standing retail properties.

Residential: 
These REITs are further subdivided into those that own multifamily apartments and manufactured home communities. Some analysts further segregate those REITs that own student and military housing.

Diversified: 
REITs that own a variety of property types.

Lodging/resorts: 
REITs that primarily own hotels, motels, and resorts.

Health care: 
These REITs specialize in owning hospitals and related health care facilities that are leased back to private health care providers who operate such facilities.

Self storage: 
These REITs specialize in ownership of self storage facilities.

Specialty: 
These REITs specialize in numerous types of properties, including prisons, theaters, golf courses, cellular towers, and timberland. Specialty REITs have been a rapidly evolving segment of the industry.

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The rise of India’s commercial real estate market

While talks about the residential real estate sector have got people gripped, commercial property is not far behind. Thankfully, good days have returned for office real estate property in India, with lots of domestic and foreign companies looking for space and many businesses in expansion mode. Bangalore being the prime location for office spaces, many companies are purchasing apartments in Bannerghatta road Bangalore and converting them into office spaces.

• Change in government

One of the most stabilizing factors is last year’s general election and that was one of the reasons behind the upswing of the real estate. It brought with it new confidence in the country’s economic development. Though, the country witnessed uncertain times in the first quarter of 2014, and market morale was low, sentiment improved gradually following the elections. Apart from buying apartments in Bannerghatta road Bangalore, the city of Mumbai, for example, witnessed 65 per cent appreciation in average deal sizes between the second quarter of 2014 and the second quarter of 2015.

The growth of the real estate sector can also be attributed to expanding businesses, especially due to India’s emergence as an attractive offshore destination. The government’s decision to introduce incentives to attract foreign investors plays a role. Also, the availability of a large pool of highly skilled technicians and engineers, customer-friendly banks and housing finance companies, the country’s favorable demographics, and increasing purchasing power. Increasing professionalism among real estate brokers is also cited as an advantage.

• The big three cities

Major shares in the profit are gained from tier 1 cities such as Bengaluru, Mumbai, and New Delhi. These cities are technological, commercial, and political hubs respectively. According to a survey, these cities even outperformed global commercial property market when it comes to annual rental yields. The Indian office market has been maintaining a healthy traction in 2014 and has clocked office space transactions of 18 million square feet in the first six months of 2015.

It is a record year for Bengaluru, which is expected to transact office space to the tune of about 12 million square feet in 2015. The three cities have also endured the largest individual transactions in the sector, with big corporations and expansive start-ups such as Flipkart and Snapdeal picking up a lot of office space. Some of them are purchasing apartments in Bannerghatta road Bangalore and expanding them to set up their offices. And with the growth in office activity, other commercial spaces follows suit, particularly retail, as well as hospitality due to increasing demand for lodging in the trade hubs from business travelers.

• REITs on their way

The Real Estate Investment Trusts (REITs) is expected to come up with a future boost. However, due to some legal barriers, the scope of taxation proceeds from such trusts remains unresolved. Foreign investors will be allowed to buy units. It will help reduce pressure and stress on the banking system to fund the real estate sector as REITs will enable the industry to propose fresh equity by attracting long-term finance from domestic and foreign investors. The Indian REIT sector is expected to give a further push to commercial real estate and is tipped to attract investments. So far, REITs worth a total of $20 billion in assets are mainly focusing on Grade A office space and parks, logistic space and warehouses, malls and shopping centers, hotels and other commercial space.

Today, the potential of the Indian real estate sector is enormous, but there needs to be a clear solution with regards to REIT taxation. Among other trends, there's been a steady growth of the commercial sector, which is favorable for organizations.







This is a guest post by Deepak Yewle

Hits and Misses of Budget 2015 for Real Estate Sector in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Leading up to 28th February 2015, Budged 2015 was the most talked about event among business circles. Real estate developers, housing finance companies, banks, consultants were banking on reforms to boost the real estate sector. Did the sector get its due? Or there still is uncertainty looming large? We find out:

• Allocation of Rupees 14000 Crores (2015-16) for National Housing Mission:

Prime Minister Narendra Modi has spoken about housing for all by 2022. As per the recent figures, there is need to build about 2 crores houses in urban areas and 4 crores houses in rural areas. National Housing Mission will be prepared by ministries of rural and urban development. This mission will subsume existing housing schemes. 60 Lacs houses will be built yearly for next seven years in rural areas.

• Tax benefits for Real Estate Investment Trusts (REITs):

Mr. Jaitley in his budget 2015 speech rationalized capital gains tax regime for the sponsors of newly-created business structure REITs. At the same time, the Budget also proposed that the rental income arising from real estate assets directly held by the REIT would be allowed to pass through and to be taxed in the hands of the unit holders of the REIT.

"I therefore propose to rationalize the capital gains regime for the sponsors exiting at the time of listing of the units of REITs and INViTs, subject to payment of Securities Transaction Tax (STT). The rental income of REITs from their own assets will have pass through facility," Mr. Jaitley said.

• No incentives to affordable housing sector:

The real estate industry was expecting that government would grant infrastructure status to affordable housing sector; however, budget 2015 disappointed them on this count. With infrastructure status, the cost of borrowing would have decreased for developers as well as home seekers.

• Hike in service tax:

The service tax has been hiked from 12.36% to 14%. In other words, the cost of home will now go up. With this hike, the property value will rise by 0.41% of the old property value (when service tax was 12.36%).

• Introduction of Benami Transaction Bill:

Mr. Jaitley announced the introduction of Benami Transaction Bill in his speech. The whole idea behind this bill is to curb black money in the property market. Prohibition of acceptance of an amount of more than Rs 20,000 in cash for any property deals is also part of the bill. However, will this bill have any impact on the realty market? Some feel, while the intent of government is good, but this may result in investors exiting the market.

• Fiscal Prudence (Which means EMI may start to come down soon):

While the budget 2015 was a dampener for most real estate stakeholders, however, they all looked at the surface and did not scratch it. Most important factor has been missed by all Pundits looking at the real estate sector. Mr. Jaitley’s focus on fiscal consolidation will go down well with RBI. What it means? Well, the interest rates may start to come down soon. A reduction in interest rate will be good news for home loan consumers and those planning to take a loan to buy houses and cars. Sector revival is expected once interest rates begin to come down.

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REITs: SEBI’s Next Move to Revive Indian Realty Market

After a long wait of almost 8 years, the Securities Board of India (SEBI) finally gave a nod for establishing the Real Estate Investment Trust (REITs) in India. Before marking a foray in India, REIT had already made a name for itself in more than 20 countries in different parts of the world. This operating body receives special tax treatment and takes care of the realty projects that comprise, office buildings, commercial and residential buildings, hospitals, shopping malls. There are other realty assets that the organization (trust) takes care of, such as construction of hotels & resorts, multiplexes and warehouses.

However, very few people know the organization has played a pivotal role in helping the Indian real estate grow big like never before. With continued support from REIT, Indian realty market has achieved an enviable stature on a global platform.

Let us have an inside perspective on this:

REIT: The Meaning Explored

Real Estate Investment Trust is actually a trust-like company or organization that operates income-producing real estate assets. The realty projects that are likely to follow on the company’s radar could be residential as well commercial projects; preferably commercial ones the most as they generate employment and income both in a good number. The people who are keenly following the realty market have to halt for a moment and take note of the organization as it is helping the realty market in a big way.

SEBI under its aegis brought REIT on to the main stage to help Indian real estate market come out of the unfortunate liquidity crunch and poor sales figures. The market regulator has jotted down few protocols that the trust company will be following. Here are some of them:

1. Instead of launching any particular realty related schemes, REITs will raise funds through initial offers and will be allowed to raise additional funds through follow-on offers as well.
2. At least 90% value of REITs assets should be incurred in ready properties and the rest 10% can be utilized in other specified assets. 
3. REITs will be quiet far away from vacant and agricultural lands. 
4. The assets held by REIT will have to be valued through physical inspection of properties, at least once a year.

However, one can’t figure out the benefits that the organization has brought in here, merely by reading through the protocols mentioned above. In fact, the figures are analytical in nature and straightaway just can’t understand the good things.

Here’s an inside perspective:

A Sigh of Relief For the Indian Realty Market

The biggest announcement made in the Union Budget 2014-15 brought some respite for the Indian real estate domain. One cannot imagine the potential benefits the REITs can bring in for the domain. Here are some of the advantages:

• Improved Liquidity Situation

The decision to allow listing of the REIT in India will give a positive boost to the liquidity situation of cash-starved developers. These developers have been struggling really hard to fetch funds for their own construction activities. The advent of the trust company has already opened doors for an investment avenue that is fool-proof than under construction properties.

• Indian Realty Market Yearning for REIT

Among major reasons behind India getting actually desperate for REIT was to pull in big time investors. Union budget’s green signal to open up such bodies in the country is expected to bring in globally accepted protocols to the Indian realty market’s funding schemes. Through this, revival of interest of both global and domestic investors is expected.

• Benefit for the Buyers

REIT makes use of investors’ money to purchase real estate assets for the purpose of rentals and capital gains. Through this, buyers will also be benefited by realty price appreciation in preferred areas sans hassles associated with buying and maintaining properties. The buyers will now have seamless ways to pitch in for best residential or commercial realty projects.

• Realty Market Will Now Mature

With stage set to allow fully-fledged REIT to enter India completely, Indian real estate domain is on the verge of getting matured and more productive. The organization will enable flow of more professional investment and management in the domain. Moreover, individual speculation in real estate assets will also be reduced.

• Increased Reliability in Indian Realty Market

There are special benefits that the REIT is expected to bring in the Indian realty market. Advantages like increased accountability & reliability in the sector. The organization’s support to the Indian real estate market will also pull in greater FDI in the sector.

Indian Real Estate Domain On a Roll

There was a time in the growth of the Indian realty market when there was a persistent struggle for alternate avenues of funding. Other than traditional banks and financial institution, permission to launch REIT in India will act as a key launch pad for smoother capital markets inclusion and clean exit options for investors.

Once formally announced by SEBI on the full-fledged operation of the organization, REIT will help the property market in a long way and will also help in reviving global investor sentiments.


This is a guest post by Vineeta Tiwari who is a keen writer on Global Economy and Realty market.