First Reit at least a year away: Experts

Despite government and regulators clearing the decks, the launch of the first real estate investment trust could take could another year, say industry players. Reit invests in real estate and trades on exchanges like a stock. It allows small and large investors to acquire ownership in real estate ventures.
 
Realty companies have set the ball rolling to raise resources through Reits but face hurdles.
 
Capital gains tax and stamp duty at the time of land transfer remain key impediments for the launch of these instruments, say bankers and consultants involved in the preparatory work for the instruments.
 
While one of the aspiring Reit candidates has been stuck due to improper land title, two others are yet to start the land-transfer process, said sources.
 
Consultant Knight Frank says Reits are at least 12 to 14 months away from becoming a reality.
 
According to regulations, a real estate entity has to transfer the land, which is part of the offering to Reit, before the issue opens for public subscription. Hence, the entities will have to pay stamp duty and capital gains during transfer of ownership. If the Reit fails to get subscribed, the company will be forced to reverse-transfer the land, sparking stamp duty again, said bankers.
 
"Developers demand tax exemption on this front," said Neeraj Sharma, director at Grant Thornton Advisory.
 
Sharma said either developers have to identify assets and transfer them to Reit or transfer the special purpose vehicle holding the assets to Reit. In both cases, they have to pay up taxes, he said.
 
"We have advised one of our clients to go for roadshows first and get a feel of the investor mood as these are not tested products in India like Initial Public Offerings of shares, or issues of non-convertible debentures. If they are sure the Reit issue will sail through, then transfer the land to Reit," said an investment banker with a global firm.
 
Blackstone Embassy, DLF, RMZ, K Raheja Corp, Panchshil are most likely to float Reits. Embassy Blackstone said the joint venture was in the process of forming and registering a Reit and confident of filing papers soon. Embassy group has already filed intent papers to form a Reit.
 
Market participants say there are some fears about corporate governance structures of Reits. "There is a strong chance the asset manager for the Reit is related to the promoter of the company in some way. In such case, the issuers are expecting more clarity from the regulator on what would amount to a related-party transaction and how would arm's-length be interpreted," said the banker quoted earlier.
 
According to Knight Frank, Reit as an investment vehicle has a huge opportunity as the country has a rent-yielding office inventory of 537 million square feet valued in excess of $70 billion.
 
While Reits were first proposed in 2008, successive governments gave some relaxations or the other in the last couple of years.
 
Recently both the market regulator and the insurance regulator gave permission for mutual funds and insurance companies to invest in Reits.

Breaking down the fund

• Real estate investment trusts or Reits are comparable to mutual funds.
• A Reit invests in real estate and trades on exchanges like a stock
• Reits allow small and large investors to acquire ownership in real estate ventures
• Reits provide investors with an extremely liquid stake in real estate.
• Reits own and in some cases operate commercial properties such as apartment complexes