India lays ground for real estate investment trust roll-out

Finance Minister Arun Jaitley announced in Thursday's budget statement that REITs would have pass-through status - which means they are not liable for corporate tax - as well as receiving other "necessary incentives." The move is intended to create a single layer of tax for the structures, addressing investors' concerns that they might be taxed at multiple points.

The government also wants to introduce a REIT-like structure for infrastructure projects, known as the infrastructure investment trust. They would also have pass-through tax status. "These structures would reduce the pressure on the banking system while also making available fresh equity," Jaitley said.

REITs are listed entities that invest in income-producing real estate assets, usually completed properties that generate rental income. They are means by which property developers to tap the retail investor market as well as potentially creating a new exit route for existing backers. India issued draft regulations for REITs in 2008 but then shelved as investor interest dried up in the wake of the global financial crisis.

A new set of guidelines was issued by the Securities and Exchange Board of India (SEBI) last October. Unlike most global REIT structures, India will only permit institutional investors and high net worth individuals to participate.

Only companies with assets worth at least INR10 billion ($162.8 million) can list as a REIT, provided they sell at least INR2.5 billion worth of stock in the IPO, with a minimum public float of 25%. At least 90% of the value of REIT assets must be in completed revenue-generating properties and at least 90% of the net distributable income after tax should go to the investors.

A number of investors, including The Blackstone Group, have built up sizeable commercial real estate portfolios in India that may be suited to REITs. Meanwhile, Milestone Capital Advisors and IL&FS Investment Managers already offer three REIT-like real estate rental yield funds, the first of which launched in 2008, the same year the first draft regulations came out.

Speaking to AVCJ last November, Rubi Arya, Milestone's director and vice chairman, noted that the guidelines require some further tweaking, but she was positive about the renewed momentum.

"We feel that REITs will become a reality very soon, which means more transparency and liquidity for investors," Arya said. "The minimum amount of assets required to list as a REIT is INR10 billion and not many fund houses have that size, but we already have INR15 billion and they are more than 90% leased out, so they qualify."

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• Topics
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• Milestone Capital Advisors