First mooted seven years ago and cleared by regulator Securities and Exchanges Board of India (Sebi) in 2014, real estate investment trusts (REITs) were expected to open up liquidity for cash-starved realty firms to monetise high quality rent yielding commercial assets.
But more than a year on, not a single REIT has been launched due to deterrents such as dividend distribution tax (DDT) and contentious the minimum alternate tax (MAT).
REITs are like mutual funds. While in mutual funds one invests in securities, in REITs, which can be listed, one invests in real estate assets, mainly leased office and retail spaces and the income generated is distributed in the form of dividends.
Income earned in REITs is through rents. While the Union Budget brought clarity on capital gains tax for sponsors, MAT and DDT still mar the potential. “Taxation is the reason we haven’t seen any enthusiasm for REITs. Unless that is addressed it will be difficult,” said Balaji Aiyer, deputy head, Mapletree India Management, a real estate capital management company that has invested across Asia, including a technology park in Bengaluru.
Taxation on foreign investors also deters investors. “The potential is there but there are many tax impediments. Foreign investors are still not allowed to invest. Secondly, what is the exit route? There has been an issue with taxation on foreign jurisdiction companies with assets in India,” said Amit Goenka, MD, private equity firm Nisus Finance, which raised Rs 400 crore for a real estate-focused fund last year.
Many expect provisions in the forthcoming Budget. But the indications are not encouraging. “We had thought that the industry wanted taxation at the investor’s end. Then they came back saying they don’t want any taxation at all (on REITs). If you apply it here, then you would have to apply same principle elsewhere. Plain exemption of DDT and no taxation doesn’t fit in,” Manoj Joshi, Union joint secretary, financial markets said recently.
Now real estate companies are looking at other options to raise funds. Already many domestic and foreign private equity investors and wealth funds are picking up equity stakes in realty assets and companies are also likely to look at tapping overseas markets with REIT-able assets.