REITs in india - is it the right time?

The performance of REITs in India would majorly depend on the economic circumstances, regulatory environment and the acceptance of REITs as an attractive investment option by retail investors. Until recently, development of India had been struggling due to apathy of Government authorities and policy constraints, but the recent developments in terms of various policy reforms, relaxation in FDI norms for real estate, huge investment in infrastructure, bilateral trade and cooperation with other countries and initiatives towards better governance are commendable. Political stability and the recent policy related initiatives have heartened the global investors and organisations to look towards India for business activities who refrained before from entering the Indian market due to political, policy, governance and infrastructure-related issues. The business confidence index is strengthening and economy is looking forward for another phase of decent growth.

The growth platform that India has embarked on is unprecedented. The thriving economy is a key driver of REIT growth in Indian market. Some of the salient features that aptly describe the current state of the Indian economy are transformation from an agrarian to a service economy, degenerating trade barriers, aggressive reforms, communication and technological advancements, younger population, expanding middle and superrich class, booming services sector, burgeoning infrastructure, rising consumerism, increased household incomes, increased urbanisation, and all of them would drive the growth of REITs in India either directly or indirectly.

India is consistently boosting its infrastructure to increase the supply of dwelling units, power, water, transportation facilities, communication facilities and others, and to balance the pressing demand in order to sustain economic growth. The Government is pushing for private public partnership for improvement of infrastructure sector, and soon the effects will be visible in sectors like telecom, public transport, airports, the power sector and others.  Also a number of developers are considering developing affordable housing and venturing into development of industrial parks. The budget is also very encouraging for Foreign Investors, who are once again keenly following the Indian real estate market. The intent to build 100 smart cities will ensure there are development opportunities in many more geographies and not just the big metros. These developments would provide necessary thrust to the real estate industry and, in turn, to the growth of REITs.

However, the issues related to tax structure, stamp duty etc. put a question mark as is this the right time to introduce REIT in India or not. The government initiative to provide pass through status to REITs is a positive step, however, it require further relaxation. In most countries REITs have pass-through status for tax purposes if they satisfy certain conditions such as distribution of income and minimum number of investors. Initially in Asia and Europe most of the countries did not adopt the tax transparency system in treatment of REIT’s income. This has been cited as the key reason for the slow development of REITs in those countries. There are examples like Singapore and Hong Kong where the introduction of tax transparency resulted in better development of REITs. Tax transparency in this context means the avoidance of double tax on income of REIT stocks – first at a corporate level and then at a personal level.

The demand for acquiring leased out grade ‘A’ commercial properties is already started picking up and there is growing interest to own hospitality and healthcare properties. Given the fact that REITs are an efficient way of raising capital and provide an easy exit route to investors, they can be well accepted by investors if provide better return than other asset class.

 

About the author

Surabhi Arora, leads the research team in India and has more than 13 years of experience in carrying out multi-disciplinary research and analysis in the area of finance and real estate industry. Surabhi specialises in real estate economics, policies, commercial and residential real estate research with in-depth knowledge of market dynamics across major markets in India.

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