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Real estate investment trusts (Reits), which are expected to get a green signal in the upcoming Budget, could open up a new source of funding for developers battling declining sales and high cost of funds.
Reits, similar to mutual funds that can be listed and traded on exchanges, could attract investments of $10-15 billion (Rs 60,000-90,000 crore) in the first year of operations itself, said Maadhav Poddar, associate director, real estate practice, Ernst & Young.
Reits are tax-free instruments that invest in income-generating assets such as offices and malls and distribute the income as dividend to unit holders.
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They are expected to benefit companies like DLF, Prestige, Phoenix Mills and privately held firms such as Embassy and K Raheja Corp that have a large portfolio of leased assets.
Poddar said companies like Infosys, Wipro and TCS could look at selling their office assets to Reits and taking them back on lease. “When Reits buy large assets from property developers, it helps developers to repay loans. Almost all developers have residential projects stuck over money,” said Poddar. “It will increase liquidity in the sector as a whole,” he added.
Many in the industry believe even government owned entities such as Air India, the Department of Telecom and public sector banks, which have large portfolios of offices, could look at selling them to Reits and leasing them back.
According to Morgan Stanley, India has 400 million sq ft of office and mall properties valued at $60 billion (Rs 3.72 lakh crore).
“Depending on the government policy, we will look at Reits,” said DLF Executive Director Rajiv Talwar. DLF has a rental income of Rs 2,000 crore a year from 20 million sq ft of assets leased out. On the company’s debt reduction plans, he said, “Reits will help if they come with the right laws.”
DLF’s debt stood at Rs 18,500 crore at the end of the fourth quarter of 2013-14 and the company said plans to reduce its debt by half could be delayed by up to two years.
However, regulators, developers and investors are waiting on the government’s view on the tax treatment of Reits.
“It is very important that Reits get the tax treatment of a pass-through vehicle. We have the Reit framework in place, but without tax breaks, the instrument will not take off,” UK Sinha, chairman of the Securities and Exchange Board of India, said on Wednesday.
Atul Ruia, managing director of Phoenix Mills, a Mumbai based developer, echoed Sinha’s views. “A Reit is not a company, it is a trust. While the special purpose vehicle pays full tax, the Reit should enjoy the pass-through status,” Ruia said.
Poddar said the government should also allow foreign direct and portfolio investment in Reits and exempt payment of stamp duty when buying and selling properties.
