REITs set to bring greater stability to Indian investment property sector
The introduction of Real Estate Investment Trusts in India will help deepen the country’s property industry and bring greater industry stability, it is claimed.
India has approved legislation allowing the creation of REITs, a long awaited move that should encourage the creation of big institutional grade buildings and give developers a ready outlet for projects, according to Shobhit Agarwal, JLL managing director of capital markets in India.
He pointed out that until now many institutional investors have been put off investing in Indian property because it is highly fragmented, sometimes with multiple members of an extended family owning a building in strata title fashion.
The Securities and Exchange Board of India (SEBI) has now outlined the basic rules for REITs and industry insiders said they are very similar to the REIT legislation in other Asian countries such as Singapore and Hong Kong.
The first talk about introducing REITs came as far back as 2008. But previous administrations dragged their feet on codifying them. Property professionals see their relatively sudden introduction after a consultation paper last October as a credit to the administration of new Prime Minister Narendra Modi and his BJP party.
Agarwal believes that the government is going out of its way to be business friendly and is putting through policies more quickly than previous administrations.
Indian REITs, like many others around the world, will be required to pay out 90% of their income from stable assets to investors. That will result in a twice yearly dividend. Only 20% of an Indian REIT’s assets can be invested in development, the riskiest end of the real estate industry, and the remaining 80% of the fund’s assets must be invested in income producing property.
Agarwal explained that since those projects, often office buildings or shopping malls, have already been developed and already have tenants, their income stream is relatively easy to predict. While they may increase in value, the REIT will hold them long term and won’t trade in and out of real estate.
‘This is not meant for speculators. These are for investors that are looking for steady returns as opposed to capital appreciation,’ he added.
The buildings must have multiple tenants to reduce risk to any one company, and there must be a single ownership structure for any building that is folded into a REIT. The REIT must also hold multiple buildings, and cannot have more than 60% of its assets in any one project. It must own assets worth US$82 million at the time of going public and must have an initial size of US$41 million on the stock exchange when it lists.
Now overseas investors will be able to access stable assets via REITs. JLL estimates that of the 370 million square feet of Grade A office stock in India, some 170 million is of REIT standards.
SEBI has also created a similar structure known as an infrastructure investment trust that will allow developers of infrastructure projects to sell those into a fund, with the same requirement to distribute 90% of profits twice a year.
Agarwal believes the current REIT legislation will appeal most to overseas investors because there will only be a 5% on capital gains, with dividends untaxed. Indian investors paying corporate taxes are faced with paying tax of 20% or more.
SEBI is likely to refine the REIT rules as the industry develops. ‘What they have announced is a starting point, it can only get better from where it is. It is a big step for the government,’ added Agarwal.