REITs in the Indian Context

Jul-2013

Presentation by MA
 Executive Summary
• Introduction to REITs
– REITs are publicly listed vehicles which own leased real estate, earn rental
income to distribute among its shareholders
– REITs offer substantial benefits to investors in terms of easy liquidity, small
ticket size, professional management, diversification etc.
– REITs are structurally similar to close ended mutual funds
• Benefits to the Government
– REITs will partly reduce private savings in gold, thereby providing the much
needed help on reducing the current account deficit
– REITs will reduce the incidence of black money in the real estate sector
– REITs will help increase tax revenues for the Government
– REITs will attract additional foreign / NRI capital to India
• Government can kick start the REIT market in India
– Position REITs as a type of close ended Mutual Fund
– Notify income tax guidelines to remove tax inefficiency and provide operational freedom
in line with industry requirements
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 REITs – An Introduction
• Real Estate Investment Trust (REIT), is a publicly listed vehicle
which typically owns rent yielding real estate (e.g. pre-leased
office), collects rent and distributes ~90% of the income to its
shareholders as dividends
• Investors buy/sell shares in the REIT from the stock exchange
(like in the case of any publicly listed scrip)
• Shareholders earn dividends and expect appreciation in value
of listed shares due to increase in underlying property value
• REIT is managed by a professional Asset Management
Company (like in the case of a Mutual fund AMC)

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Advantages of REITs to the investing public

• REITs present an excellent avenue to absorb a large part of

public savings
• Indians understand physical real estate as an asset class, but are
deterred by large ticket size, illiquidity involved, asset
management issues, high transaction costs
• REITs offer an elegant solution to most problems of the physical
real estate market
Physical Real REITs
Estate
Liquidity Illiquid Liquid
Min Ticket size Large Small
Asset Management Hassle Hassle free
Transaction Costs Huge Minimal
Diversification Very difficult Simple

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 REITs vs. Other Investment Vehicles
REITs Real Estate Mutual Real Estate PE Fund
Fund (close ended)
Liquidity Liquid & Publicly Listed Same as REIT Illiquid & Private

Mode of Investment Buy/Sell listed units on Same as REIT Subscription at time of

/ Exit stock exchange new fund raise; Exit only
on sale of investments
Minimum ticket size Negligible Same as REIT Minimum Rs. 1 cr.

Typical Portfolio Primarily Rent yielding Atleast 35% in Rent Illiquid projects /
assets yielding assets; balance in securities
other real estate
Regulatory SEBI Draft guidelines SEBI Final guidelines Alternative Investment
framework issued in 2008, no further issued in 2008; However, Fund (AIF) guidelines
action no scheme launched issued by 2012

• REITs resemble Close Ended Mutual Funds in terms of basic structure

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India is facing a huge problem of Current Account
Deficit due to large private ‘investment’ in gold

• Gold eats up a large part of Indian savings

• India savings profile: Bank deposits (45%), Gold (8-10%), Stock market (2-
5%)
• Gold imports grew at a staggering 25% CAGR from Rs. 180 bn in FY00 to
Rs. 2696 bn in FY12*
• Gold contributed ~30% of trade deficit during FY10-FY12*
• What is the key reason for huge increase in popularity of gold
 Gluttony for Gold is NOT irrational; the reason is
‘Inflation’!
• Bank deposits, the biggest avenue of savings, offer returns lower than
inflation thus eroding the value of every rupee saved!
• The dominant reason for individuals to hold savings in the form of gold is
to secure hedge against inflation*
• Other financial assets (equities, mutual funds, insurance) could protect
against inflation; however, the practical experience has been otherwise

* Source: RBI Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs, Jan-2013
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Enabling REITs in India would help partly
channelize savings away from Gold
• As per RBI* there is a need for alternative financial assets
• “Since it is difficult to directly influence the demand for gold, the policy
focus will have to be directed to offering alternative instruments that may
fetch positive returns with a flexibility of liquidity”*
• REITs offer protection from inflation
• REIT investors are protected from inflation as inflationary times typically
witness appreciation in the value of the underlying property
• Ultimate benefit of reducing demand for gold
• Lower public investment in gold  Lower Current Account Deficit  Stem
Rupee Fall  Control inflation  RBI gets headway to reduce interest
rates  Turn around in economic cycle & revival of Investor sentiment

* Source: RBI Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs, Jan-2013
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 REITs will reduce the incidence of black
money in the real estate sector
• REITs
– REITs are managed by third party institutional fund managers
– Transfer of control from retail level transactions (which may involve
cash) to professionally managed REITs
– All transactions through banking channels

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REITs will help increase tax revenues for
the Government
– Presence of professional management will ensure better
tax compliance & higher tax revenues:
• Service tax on rental income
• Capital gains on sale of property
• Corporate tax
– New avenues for taxation
• Dividend tax on distribution to shareholders
• Securities Transaction Tax (STT) on trading of REIT units

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 REITs will attract foreign / NRI capital to India, which
otherwise would get channelized to Singapore

• Several large institutional investors (including Sovereign

Wealth Funds) would like to invest in rent yielding assets in
India
• NRIs have a liking for real estate in India, but often face the
practical difficulties of managing assets from outside India
• As India currently does not offer a REIT framework, this off-
shore pool of money is restricted from entering India
• A part of this pool of foreign capital is currently redirected to
Singapore, which offers a facility to list assets located in India

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 How can Government kick start the REIT
market in India
• REITs should be positioned as a type of close-ended Mutual
fund instead of a new asset class due to following reasons:
• Co-existence of REITs as well as REMFs will create confusion in the minds
of investors
• Fundamentally, REITs are similar to close ended mutual funds
• Educating the retail investor community on a new concept like REIT will
take a very long time

– Suggested Legislative changes

• SEBI guidelines: Consolidate REIT and REMF guidelines in to a single
regulation

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 How can Government kick start the REIT
market in India
• Remove other legal impediments
• Income Tax
– Currently, it is tax inefficient to hold assets through a Real Estate
Mutual Fund rather than hold it directly (due to high dividend tax rate)
– Suggested Legislative changes:
» Income Tax: REITs should be at par with Equity Mutual Funds.
This will ensure that there is no double taxation

• SEBI guidelines
– Currently, the SEBI guidelines on Real Estate Mutual Funds require
direct ownership of real estate by the fund. Also, prescribed debt levels
are low
– Suggested legislative changes:
» Allow holding of assets through Special Purpose Vehicles (SPVs)
» Allow prudent gearing levels 12