By Vivek Gupta and Rushank Muthreja
Real Estate Investment Trust (REIT) — the new kid on the Indian bourses — presents an fascinating investment chance for investors and corporations, and a exceptional automobile for issuers to access capital. Burdened with substantial capital getting locked in a industrial actual estate portfolio, inclusion of industrial assets into a REIT at industry worth delivers sponsors with a mechanism to unlock the assets’ accurate possible. On the investor side, low actual interest prices naturally push greater return-looking for capital into avenues such as REITs, devoid of the complete related dangers emanating from equity. India has observed some REIT activity but is slated to see a lot more and that is exactly where sponsors of such trusts need to program ahead, just before moving into the REIT structure, on various counts such as structural, industrial, legal, monetary reporting and regulatory elements.
What hurdles issuers could face
The 1st widespread hurdle for the issuers would be to get the optimal REIT structure in spot that is compliance with SEBI regulations, and marries industrial and tax objectives — such as the inclusion of beneath-building assets, asset valuations, leverage caps, and so forth. Structures need to be optimised to boost Internal Rate of Return (IRR) considering the fact that it straight hyperlinks to worth at listing.
From a monetary reporting point of view, the issuer of the REIT would want to be ready to deal with comprehensive disclosure needs, complicated valuations, projected monetary details, accounting for combined and carve-out monetary statements and a myriad of interpretive matters that are most likely to unfold. Given the exceptional nature of some of these troubles, this may perhaps warrant consultations with regulators as effectively.
Additionally, efficiency measures such as Net Operating Income, utilised globally by REITs, are not ordinarily recognised measures in the Indian framework and the possibility of stitching these into the monetary details would need deliberation and consultations for the issuer.
Road to listing on bourses
The runway to a REIT listing could differ based on the readiness of the issuer. Other essential work streams that would kind element of this course of action would contain activities such as building an all round program and tactic (timing, option of assets, restructuring), execute on the optimal structure, getting a variety of regulatory approvals, finishing the due diligence exercising, launching roadshows, deciding IPO size and pricing — all of this and a lot more would lastly lead to the listing. The course of action usually would involve a variety of parties — investment bankers, lawyers, tax advisors, valuers, auditors and accounting advisors, media advisors and underwriters to name a handful of. Therefore, a effectively believed out program, with sufficient runway and a powerful group of seasoned advisors would serve an issuer effectively.
REIT has been a results story globally and is a effectively-established model that investors recognize. Globally, REITs are the main capital raise avenue for actual estate assets. It is estimated that REITs account for more than 90 per cent of the capitalisation of the sector in the USA and practically 50 per cent in Singapore and Japan.
Strong capital appreciation to attract investors
India has also taken measures toward producing REITs an eye-catching investment choice. Over the final handful of years, enabling regulatory framework has been set up, stringent regulations such as the mandatory distribution of 90 per cent of money flows, the prohibition of outstanding debt higher than 49 per cent and vital disclosure needs, coupled with the capability to diversify, tends to make REITs a viable investment avenue.
In India, it took just about 5 years for us to see our 1st REIT. After REIT regulations have been issued in August 2014, India saw its 1st REIT listing on 1 April 2019. About a year later, in August 2020, a further mainstream industrial actual estate developer listed its REIT on the Indian bourses. In our expertise, these REITs have demonstrated powerful efficiency – providing capital appreciation of at least 7 per cent Compound Annual Growth Rates and quarterly dividend payouts in the variety of 1.8 per cent to 2.3 per cent (efficiency up to the quarter ended 31 December 2020). The COVID-19 pandemic has not dampened the enthusiasm that REITs have designed in the capital markets.
Dividends and tax advantages for investors
REITs provide particular distinct positive aspects to institutional dollars-chasing yield-producing Grade A industrial and marquee mixed-use rental assets.
Firstly, SEBI regulations make certain powerful governance and transparency requirements. A REIT is professionally run by independent trustees and an investment manager. Other governance needs contain bi-annual valuation needs, disclosure needs, unitholders approval of precise matters, and so forth.
Secondly, REIT regulations offering for a mandatory 90 per cent distribution of money earnings at common intervals to the investors permit predictable common returns to the investors and aids yield investors to meet their expectations.
Thirdly, tax pass-by way of advantage is substantial and in line with worldwide benchmarks – assisting investors to meet their IRR thresholds. India has traditionally been a higher tax jurisdiction with precise profit repatriation taxes. Profit repatriation from REITs on the other hand is tax-free of charge for unitholders offered the underlying projects are paying common taxes beneath the old earnings tax regime. Currently, the two REITs listed in India have created use of this choice.
Further, in the current Union Budget 2021, the Government has proposed some favourable measures for REITs. From a tax point of view, withholding tax on dividend from the specific goal cars to a REIT has been removed, which is anticipated to enable lessen tax leakage. Further, REITs will now be in a position to raise debt from foreign portfolio investors which will additional ease access of finance to REITs, augmenting funds for the sector. The provisions of Securities Contracts (Regulation) Act, 1956 (“SCRA”) are also proposed to be amended to recognise pooled investment cars and to recognise units, debentures and other marketable securities issued by REITs as “securities”. Some of the other essential asks of the business, such as bringing the period of holding of units at par with shares, have not been addressed in the spending budget.
We have a exceptional chance to tap into what is clearly a big worldwide pool of hybrid capital — the India REIT story is effectively-positioned to give the considerably-required capital impetus to the economy.
(Vivek Gupta is Partner and National Head – M&A/ PE Tax, KPMG in India and Rushank Muthreja is Partner, KPMG in India. Views expressed are authors’ personal.)