The Union Budget 2016-17 was a mixed bag for the real estate sector. The reforms announced in the budget were largely directed to support the supply side of the real estate sector, while the demand side was offered limited incentives. Overall, various reforms such as removal of Dividend Distribution Tax (DDT) on Real Estate Investment Trusts (REITs) Special Purpose Vehicle (SPV), direct and indirect tax benefits to affordable housing, tax incentives to first time home borrowers etc are expected to support the sector growth.
In our view, the most prominent announcement was the removal of DDT, which was earlier applicable on payment of dividends by a REIT SPV.
The DDT issue was the only major roadblock in successful take-off of REITs in India and with its removal, we may witness listing the first REITs later in the year or early next year. It is estimated that in India has potential for listing of about about 200-250 million sq ft of REITable assets worth US$35-40 billion and close to half of it may get realised in next 2-3 years. Already, few large developers have announced plans to exit from their commercial assets through REITs.
For retail investors, REITs will open up an additional investment platform. They would mostly help individuals looking for a safe annuity investment product. Generally, commercial properties generate a yield in the range of 8% to 10%, excluding any capital gain or loss. Such investment product was out of the reach of most individual investors due to high ticket price and associated risk of commercial properties.
REITs are also efficient from taxation perspective, compared to direct ownership. The tenure for classifying capital gains as long term in case of REITs is just one year, while in direct ownership, it is two years (recently reduced from three years). In our view, individual investors may consider including REITs in their investment portfolio keeping in view of own investment objectives and their need for diversification and risk positions.
The author is partner and head of real estate and construction sector, KPMG in India