What REITs (Real Estate Investment Trusts) Mean For Indian Real Estate

Kishor Pate 2Kishor Pate, CMD – Amit Enterprises Housing Ltd.

The real estate sector in India has been lucrative for savvy investors over the last decade, but it has not been without accompanying uncertainties.

The introduction of REITs (Real Estate Investment Trusts) will open up a platform that will allow all kinds of investors – even those with smaller budgets – to make safe and rewarding investments into the Indian real estate market.

The best thing about REITs is that investors can start with as small a sum as Rs. 2 lakh to secure units in exchange.

The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI) and like mutual funds, it will pool the money from all investors across the country.

The money collected from the REIT funds will subsequently be invested in commercial properties to generate income.

A REIT will need to be registered via an IPO or initial public offering. REIT units, as such, will have to get listed with exchanges and consequently traded as securities.

The SEBI board has kept the minimum asset sizes to be invested in at Rs. 500 crore. However, the minimum issue size would have to be less than Rs. 250 crore.

As with stocks, the investors here would be able to buy the units from either primary and/or the secondary markets.

How does a REIT work?

REIT is a process to generate funds from a lot of investors to directly invest in profitable real estate properties like offices, residential units, hotels, shopping centers, warehouses and more.

All trusts with REIT will be listed with stock exchanges as they would be structured like trusts. Consequently, REIT assets will be held with independent trustees for unit holders / investors.

Role of the trustees

Trustees with REIT have defined duties which typically involve ensuring compliance and adherence to all applicable laws that protect the rights of the investors.

The objective of REITs

A REIT’s objective is to provide the investors with dividends that are generated from the capital gains accruing from the sale of the commercial assets. The trust distributes 90% of the income among its investors via dividends.

Apart from minimum entry level, a REIT is supposed to provide diversified and safe investment opportunities with reduced risks, and under a professional management to ensure the maximum return on investments.

The advantages with REITs include:

  • Income dividends: 90% of distributable cash at least twice in a year
  • Transparency: REIT will showcase the full valuation on a yearly basis and will also update it on a half-yearly basis
  • Diversification: According to the guidelines, REITs will have to invest in a minimum of two projects with 60% asset value in a single project
  • Lower risk: At least 80% of the assets will have to be invested into revenue-generating and completed projects.

The remaining 20% of the properties that include properties like under construction projects, equity shares of the listed properties, mortgage-based securities, equity shares that derive a minimum of 75% of income from Government securities or G-secs, money market instruments, cash equivalents and real estate activities.

The REIT concept has been in the news for some time now. However, the real estate regulations rolled out so far have not quite helped bring them to Ground Zero in India as yet.

REITs’ exemption from tax on the distribution of dividends would make it much more attractive for investors.

According to a recent report by Cushman & Wakefield, commercial properties in India that are ‘REITable’ investment opportunities are between $43 billion and $54 billion across the top cities.

Are REITs more attractive than actual property purchase?

Investing in REIT can be compared to investing in Gold Bonds. Indians are partial to buying physical gold rather than in Gold Bonds, implying that having one’s own investment in property will always provide Indians greater satisfaction than mere paper investments.

The Indian property market is now almost stabilized and it is the right time to buy self-owned homes. While it is human tendency to wait and watch, the bottom of the market cannot be fathomed accurately at the best of times.

At the end of the day, REITs are investment instruments and not a means to acquire actual property – which is always high on every Indian’s wish-list.

A budget that clearly favours purchase decisions for first- time home buyers and is a step closer to the Prime Minister’s mission to provide Housing for all by 2022 is in place. 2017 is certainly the year to make home ownership a reality.

About The Author

Kishor Pate, Chairman & Managing Director of Amit Enterprises Housing Ltd. is the driving force behind one of the most successful real estate development firms in Pune and beyond.

Apart from its signature luxury projects like Montecito in Sahakar Nagar and other premium gated townships, AEHL has also launched highly successful affordable housing projects like Astonia Classic and Colori in Undri and the Mediterranean-style township Astonia Royale in Ambegaon.

 

8 Expectations the Real Estate Sector have from Union Budget 2017

Kishor Pate 2Kishor Pate, CMD – Amit Enterprises Housing Ltd.

The real estate sector has been the second biggest employer for India after agriculture, and market estimates suggest that it will grow by as much as 30% in the next decade.

Consequently, stakeholders have high expectations from the 2017-18 Union Budget. Here are 8 such changes that the industry and its stakeholders are unanimously looking forward to:

  1. Income tax relaxation

As of now, the tax deduction limit for home loans is just Rs. 2 lakh, which becomes insignificant when you take into account the high prices of properties in our larger cities.

In Mumbai, for instance, the standard housing price is Rs. 1 crore, so the current tax deduction limit is insignificant for homebuyers in the financial capital.

Apart from extending the tax exemption for home loans to at least 5 lakh, the budget should also introduce concessions on insurance premiums to encourage buyers insure their property.

  1. Increase in HRA deductions for the self employed

Salaried individuals already get HRA (house rent allowance) as a component of their income, and can also claim deductions on it.

However, self-employed individuals are limited to only Rs. 2000 as a maximum deduction on HRA as per the provisions of Section 80GG. The 2017-18 Union Budget should address this dichotomy.

  1. Standardize construction materials

A major reason for increasing home prices is the constantly escalating cost of construction materials like cement and steel.

Standardization of such materials can help reach tax clarity and also make real estate a viable opportunity for investment.

  1. Single window clearances for real estate projects

As per the usual process, real estate projects need to go through a long line of approvals, and this bureaucratic process has been resulting in delayed deliveries.

Single window clearances have been a long-awaited step to reduce these bureaucratic setbacks. Once in place, it can give a major boost to the market.

Union Budget 2017

  1. Simpler tax norms of REITs

Until today, the real estate sector has not benefited from any REIT listings, with the model in its current format still weighed down with multiple taxes.

Taxation for REITs needs to be simplified to allow developers and investors to benefit from REIT listings. It is necessary that the Union Budget 2017-18 recognizes the importance of REITs and provides:

  • Lower taxation on REIT income
  • Reduction/removal of service tax with leased premises
  • Waiving capital gains during transfer of property to REIT
  1. Better GST Clarity

Although the GST (Goods and Services Tax) structure has been declared, stakeholders are eagerly waiting to understand the rates applicable to the real estate / construction industry.

We seek clarifications on abatement schemes, and scenarios when developers use composition schemes and the resultant credit for input tax.

  1. Financial protection with project delays

Currently, the interest deductions associated with self-owned homes has been limited at Rs. 2 lakh. However, for projects under construction, the deductions applicable are just Rs. 30,000. Further, the applicable period for the interest is 3 years, starting from the year that the loan was approved.

This has proved to be a hardship for property buyers and investors. Union Budget 2017-18 should focus on further interest deductions in late deliveries and also amend the period of repayment from the year the possession was due.

  1. Clarification on PMAY beneficiaries

According to a recent announcement by the Union Government, a 3% interest rate is applicable for loans up to Rs. 12 lakh and 4% up to Rs. 9 lakh, as per the PMAY (Pradhan Mantri Awas Yojana) scheme.

The scheme also states that two new income categories have been added to avail higher loan amounts with higher subsidies. We look forward to further clarifications on the definition of these beneficiaries.

About The Author

Kishor Pate, Chairman & Managing Director of Amit Enterprises Housing Ltd. is the driving force behind one of the most successful real estate development firms in Pune and beyond.

Apart from its signature luxury projects like Montecito in Sahakar Nagar and other premium gated townships, AEHL has also launched highly successful affordable housing projects like Astonia Classic and Colori in Undri and the Mediterranean-style township Astonia Royale in Ambegaon.