In a bid to boost investments in the real estate sector, finance minister Arun Jaitley on Thursday announced that Real Estate Investment Trusts (REITs) would get a pass-through entity status. A pass-through entity does not have to pay corporate tax and the tax responsibility is passed through to its shareholders.
REITs are just 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 to unit holders in the form of dividends.
“We are starved for liquidity at this point of time,” said Anuj Puri, chairman and country head of Jones Lang LaSalle India, a real estate consultancy. “Getting in funding, and that too from overseas, is huge. If the pass-through status wouldn’t have come in then REITs would have never been a success. What it means now is that there will not be double taxation.”
Real estate companies as well as market regulator Securities and Exchange Board of India (Sebi) have been batting for REITs for some time.
REITs could become a vehicle for real estate developers to access cheaper funds for developing and monetising their assets. According to market watchers, the investment trust could attract investments of as much as Rs 60,000 crore over a period of time.
Sebi had issued draft norms for REITs last year itself. But it too had maintained that any final announcement and implementation would depend on whether the government gives them tax treatment of a pass-through vehicle.
Puri estimates that once REITs are allowed, in the first year itself, funds worth Rs 5,000-Rs 10,000 crore would come into the market.
“I think that the Union Budget provides some clarity on REIT listing in India. REITs are expected to attract more global investment and bring transparency into the real estate sector,” said Jackbastian Nazareth, group chief executive officer of Puravankara Projects.
Developers say once REITs become a reality, funds will become available at a much cheaper rate and the funds that are currently locked into assets would then be available to be used in other projects.
Experts say that a REIT structure would reduce the pressure on the banking system and make available fresh equity to real estate developers. The investment vehicle will attract long-term finance from foreign and domestic sources including non-resident Indians.