Not DLF or Oberoi but PE firms will be first to hit the market

Capital market watchdog Sebi during its board meeting on Sunday approved regulations for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).  These regulations provide direction on the size of assets, minimum investor subscription limits, cash-flow distribution from the REITS/InvIT, listing etc.

Reducing the minimum requirement for commercial real estate asset sizes permitted to be listed in India REITs, from Rs 1,000 crore to Rs 500 crore, is likely to generate more income through this new funding channel and encourage many mid-sized development firms to consider this avenue.

Also, REITs have been made accountable and, if they choose the special purpose vehicle (SPV) route, they must have a controlling interest of at least 50 percent in commercial real estate. Secondly,  the SPV must hold at least 80 percent of the assets directly in properties and cannot invest in other SPVs, a move probably aimed at preventing funds from being funnelled into numerous entities.

REITs, however, are allowed to invest in commercial assets only.

“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. The valuation of these assets is around $10-12 billion, and this accounts for a fairly massive influx of funding waiting in the wings to hit the Indian real estate market,” said Anuj Puri, Chairman & Country Head, JLL India.

Converting such property into an REIT would allow small investors to own commercial real estate, albeit in small unit sizes.For larger investors there is the steady rental yield, which in large cities runs as high as 10 percent for commercial property as well as an appreciation in the property price.

However, builders are still awaiting more clarity on the ‘tax pass through’ aspect which is the ‘single most determinant of success’ of REITs/InvIT.

“The various taxes at the State level viz. Stamp Duty & Registration charges on the Property purchases besides Central taxes, create a highly tax inefficient structure for valuation and hence it will be prerogative of the respective State Government to come out with incentives to attract real estate investments in their States,” said Parikshit Kandpal, real estate analyst at Karvy Broking.

Given that more clarity is required on the taxation front, Kandpal expects private equity players like Embassy and Blackstone to make the first move while listed players like DLF and Prestige will follow suit only post the 2015 Budget , reduction in interest rates, clarity on taxation and GST (goods and services tax) roll out.

According to Anshuman Magazine, chairman and MD of CBRE South Asia, “A successful REIT market will require strong support from existing landlords and investors, as well as favourable market conditions. All in all, the establishment of the REIT market in India is still at a very nascent stage; and successful implementation and development will rest on a number of factors related to the regulatory environment, market conditions and issuers/investors.”