In an attempt to open a new fund raising window, the Union Cabinet on Wednesday allowed foreign investors to participate in real estate investment trust (REIT), according to a statement by the government.
It has incorporated REITs under Foreign Exchange Management Act (FEMA)1999 as an eligible financial instrument.
REITs allow owners of rent yielding assets (commercial and retail) to raise money from investors by pooling and listing them as trust.
The participation of foreign investment has so far been prohibited in REITs under Foreign Exchange Management Act (FEMA) 1999. “The intent of introducing the instrumentality of REITs is to reduce pressure on the banking system to which the real estate sector looks for funds, free up existing funds of banks and to encourage construction activities,” the statement said.
It added that REITs, while attracting long-term finance from foreign and domestic sources including NRIs, would make available fresh equity capital to the sector.
The instrument is used in several countries for investments in real estate.
With REIT regulations talking about taxation for foreign investors in detail, the change of rule to accommodate foreign investors is on the expected line.
“We believe foreign investor participation is an important aspect of success of REITs in India. While the interest in Indian real estate among foreigners has not matched the previous peak, it definitely has seen a substantial increase since 2014. Our study on private equity investment shows that the foreign private equity participation as a percentage of total has reached back to the previous peak showing increasing interest of foreigners,” said Shobhit Agarwal, managing director, capital markets, JLL India.
“We expect the first REIT to launch in 1H 2016 and if everything goes as per expectations, the REIT market in India can grow to $15 billion in three years,” he added.
Since it came to power last year, the government has taken a slew of efforts to make REITs a reality in India. Most recently, it announced that minimum alternate tax (MAT) will be applicable on the real estate and infrastructure investment trusts only when there is actual transfer of their units. Earlier, MAT was applicable on exchange of equity shares of a special purpose vehicle for REIT or InvIT units.
In the Union Budget, 2015, it had accorded pass-through status on rental income of REITs and had promised to rationalise capital gains tax on it. Back in August, 2014, Securities and Exchange Board of India notified norms for setting up REITs in India, six years after draft norms were floated.
REITs will prove to be an important instrument of fundraise for owners of commercial assets in India. Funding has been a matter of concern for these assets as they are heavily dependent on banks. Taxation challenges around the structure have proven to be a big hurdle in making it a reality.
As clarity has started to emerge, a slew of companies has firmed up plans to list assets under REITs.
The biggest developer in the country DLF Ltd has reiterated its plan to launch separate REITs for commercial and retail assets. It has also gone ahead and said it will be the first company to do so, even when it is embroiled in a legal tussle which bans it from accessing capital market.
Early this year, the Securities Appellate Tribunal (SAT) upheld capital market regulator SEBI’s finding that DLF resorted to sham transactions around a decade ago but said its contention that the company purposely failed to disclose it during the IPO and is held liable for the lapse is not fully sustainable.
SAT quashed the previous order of SEBI which put a three-year ban on the company and its key management personnel, including promoters from accessing the capital market. It had cut down the ban period to just six months which expired on April 10, 2015.
Other firms readying plans to list their assets include North-based developer Supertech, home grown private equity firm Red Fort Capital, Embassy Group. One of the biggest owners of commercial assets in India, Blackstone is also expected to list its assets for fundraise, though the company has not announced its plans.
(Edited by Joby Puthuparampil Johnson)