The biggest announcement for the real estate sector proposed by the newly elected Government in its Union Budget 2014–15 was the Securities and Exchange Board of India (SEBI) being directed to introduce Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts in India. We expect the entry of this much-awaited investment instrument to provide alternative funding channels to the realty sector. Going forward, it will also act as a key enabler for capital markets in the country, and provide investors with exit options. The industry perceives this announcement as the single most consequential reform witnessed in India’s realty sector in recent times, which will have significant positive impact on the market in times to come.
Investments in India’s commercial real estate has largely remained out of bounds for the country’s average citizen, as the realty sector so far lacked any monetization vehicle for the capital intensive sub-sectors of the commercial sector. Additionally, since such projects require huge capital inflow, broad based portfolio investments by individual investors has hardly been feasible. A possible solution to this could now be the introduction of REITs and Real Estate Mutual Funds (REMFs).
These investment vehicles are characterized by their investment in real estate assets as well as limited liability for unit holders. REITs, for instance, provide low and mid-income investors with the opportunity of becoming stakeholders in a portfolio of real estate assets, which would otherwise have not been feasible. REITs originated in the USA, and following theirsuccess were replicated across numerous economies across the globe. The USA, Australia, Japan and Singapore are among the most developed REIT/REMF markets in the world today, with their necessary regulatory frameworks in place, and significant representation of such listed instruments on their respective stock markets. Meanwhile, although India had issued draft regulations in December 2007, and draft guidelines in October 2013, SEBI was yet to formalize any definite introduction of the investment instrument in the India realty market.
The much-awaited clarity on taxation of REITs was provided in the recently presented Union Budget. Long-term capital gains and dividends to investors have also been made tax-free; while Infrastructure Investment Trusts (for Public Private Partnership arrangements in infrastructure projects) were provided a pass through taxation status too.