By Vivek Gupta and Rushank Muthreja
Actual Property Funding Belief (REIT) — the brand new child on the Indian bourses — provides an thrilling funding alternative for buyers and companies, and a singular automobile for issuers to entry capital. Burdened with important capital being locked in a industrial actual property portfolio, inclusion of business property right into a REIT at market worth supplies sponsors with a mechanism to unlock the property’ true potential. On the investor facet, low actual rates of interest naturally push increased return-seeking capital into avenues akin to REITs, with out the complete related dangers emanating from fairness. India has seen some REIT exercise however is slated to see much more and that’s the place sponsors of such trusts should plan forward, earlier than transferring into the REIT construction, on a number of counts together with structural, industrial, authorized, monetary reporting and regulatory features.
What hurdles issuers may face
The primary widespread hurdle for the issuers could be to get the optimum REIT construction in place that’s compliance with SEBI rules, and marries industrial and tax targets — such because the inclusion of under-construction property, asset valuations, leverage caps, and so on. Buildings have to be optimised to boost Inner Price of Return (IRR) because it instantly hyperlinks to worth at itemizing.
From a monetary reporting perspective, the issuer of the REIT would should be ready to take care of intensive disclosure necessities, advanced valuations, projected monetary info, accounting for mixed and carve-out monetary statements and a myriad of interpretive issues which might be prone to unfold. Given the distinctive nature of a few of these points, this will warrant consultations with regulators as nicely.
Moreover, efficiency measures akin to Web Working Earnings, used globally by REITs, are usually not ordinarily recognised measures within the Indian framework and the potential for stitching these into the monetary info would require deliberation and consultations for the issuer.
Street to itemizing on bourses
The runway to a REIT itemizing may differ relying on the readiness of the issuer. Different key work streams that may type a part of this course of would come with actions akin to creating an total plan and technique (timing, alternative of property, restructuring), execute on the optimum construction, acquiring varied regulatory approvals, finishing the due diligence train, launching roadshows, deciding IPO measurement and pricing — all of this and much more would lastly result in the itemizing. The method sometimes would contain varied events — funding bankers, attorneys, tax advisors, valuers, auditors and accounting advisors, media advisors and underwriters to call a couple of. Due to this fact, a nicely thought out plan, with sufficient runway and a powerful staff of skilled advisors would serve an issuer nicely.
REIT has been successful story globally and is a well-established mannequin that buyers perceive. Globally, REITs are the first capital increase avenue for actual property property. It’s estimated that REITs account for greater than 90 per cent of the capitalisation of the sector within the USA and practically 50 per cent in Singapore and Japan.
Robust capital appreciation to draw buyers
India has additionally taken steps towards making REITs a gorgeous funding possibility. Over the previous few years, enabling regulatory framework has been arrange, stringent rules such because the obligatory distribution of 90 per cent of money flows, the prohibition of excellent debt better than 49 per cent and important disclosure necessities, coupled with the flexibility to diversify, makes REITs a viable funding avenue.
In India, it took nearly 5 years for us to see our first REIT. After REIT rules had been issued in August 2014, India noticed its first REIT itemizing on 1 April 2019. A couple of 12 months later, in August 2020, one other mainstream industrial actual property developer listed its REIT on the Indian bourses. In our expertise, these REITs have demonstrated sturdy efficiency – providing capital appreciation of no less than 7 per cent Compound Annual Development Charges and quarterly dividend payouts within the vary of 1.8 per cent to 2.3 per cent (efficiency as much as the quarter ended 31 December 2020). The COVID-19 pandemic has not dampened the passion that REITs have created within the capital markets.
Dividends and tax advantages for buyers
REITs present sure distinct benefits to institutional money-chasing yield-generating Grade A industrial and marquee mixed-use rental property.
Firstly, SEBI rules guarantee sturdy governance and transparency requirements. A REIT is professionally run by impartial trustees and an funding supervisor. Different governance necessities embrace bi-annual valuation necessities, disclosure necessities, unitholders approval of particular issues, and so on.
Secondly, REIT rules offering for a compulsory 90 per cent distribution of money earnings at common intervals to the buyers enable predictable common returns to the buyers and helps yield buyers to fulfill their expectations.
Thirdly, tax pass-through profit is critical and in step with international benchmarks – serving to buyers to fulfill their IRR thresholds. India has historically been a excessive tax jurisdiction with particular revenue repatriation taxes. Revenue repatriation from REITs then again is tax-free for unitholders supplied the underlying tasks are paying common taxes beneath the outdated revenue tax regime. At the moment, the 2 REITs listed in India have made use of this selection.
Additional, within the current Union Price range 2021, the Authorities has proposed some beneficial measures for REITs. From a tax perspective, withholding tax on dividend from the particular goal automobiles to a REIT has been eliminated, which is predicted to assist cut back tax leakage. Additional, REITs will now be capable of increase debt from overseas portfolio buyers which is able to additional ease entry of finance to REITs, augmenting funds for the sector. The provisions of Securities Contracts (Regulation) Act, 1956 (“SCRA”) are additionally proposed to be amended to recognise pooled funding automobiles and to recognise models, debentures and different marketable securities issued by REITs as “securities”. A number of the different key asks of the business, akin to bringing the interval of holding of models at par with shares, haven’t been addressed within the price range.
We now have a singular alternative to faucet into what’s clearly a big international pool of hybrid capital — the India REIT story is well-positioned to present the much-needed capital impetus to the economic system.
(Vivek Gupta is Associate and Nationwide Head – M&A/ PE Tax, KPMG in India and Rushank Muthreja is Associate, KPMG in India. Views expressed are authors’ personal.)