While external factors have highlighted the attractiveness of India as an investment destination, several reform measures are necessary to ensure that our economy is placed firmly on a double-digit growth path.

To develop the real estate markets, Real Estate Investment Trusts (REITs) should become a reality. The concept of REIT has only recently received regulatory backing through SEBI (Real Estate Investment Trusts) Regulations, 2014 and introduction of FDI in REIT under automatic route in November 2015 gazette notification.

REITs are permitted to raise funds through an IPO and thereafter through FPO, QIP, rights issue, OFS and any other mechanism specified by SEBI. Thus, REITs provides an option to the retail investor, through a regulated and transparent mechanism, to participate in the growth of the Indian real estate sector which so far has been the prerogative of the HNI/Institutional investor class. REIT is typically a liquid, dividend-paying and asset-backed investment.

REITs can invest in shopping malls, office buildings, apartments, warehouses and hotels at different locations. Individuals can invest in REITs by purchasing the shares directly on an open exchange.

It also helps investors to arrive at investment decisions quickly since they don’t have to go through the property-related regulatory formalities which are being carried out by the investment manager. REIT can make investments either directly or through special purpose vehicles (SPVs) and are governed by the conditions specified in the REIT guidelines.

Better transparency

The last Budget gave relief to sponsors from minimum alternate tax (MAT) in respect of gains arising on transfer of a capital asset to a business trust in exchange for the units of that trust. This allows owners to transfer the asset to the business trust without tax liability.

Over the last few years, the government has improved the transparency in this sector to attract retail funds; the road map for REIT listing has been cleared, opening up a new investment opportunity.

Given that REIT will invest in the SPV that owns the asset, dividend distribution tax (DDT) on distribution of dividend by the SPV to REITs is a big negative for investorreturns. REIT is primarily an income product and the application of DDT takes away from its attractiveness. Another negative is the withholding tax of 10 per cent on distribution of such income to all unitholders.

REITs returns are based on the asset yields and to be attractive, the returns need to be higher than fixed deposit rates, which currently is not the case.

The investor is unlikely to shift his investment to REIT till such time he perceives the risk return to be worthwhile. In mature markets globally, REITs offer much higher returns than fixed instruments. India would do well to model its REIT on the lines of the REIT in Singapore, one of the early adopters. Singapore provides wide scope of investible assets and permits investment in assets situated outside its jurisdictions.

Among the issues that need to be resolved are MAT and stamp duty implications. Another important step to encourage retailparticipation in REITs is to lower the minimum investment subscription amount and trading lot size. Currently, subscription amount at ₹2 lakh and trading lot size is a minimum 1 lakh.

Boost for real estate

Besides, we expect the Budget to address the matter of single window clearances. It should also provide more incentives to boost development of green real estate. Availability of long-term finance at lower interest rates will have a direct bearing on the sector’s revival. Finally, the industry needs the passage of the Real Estate Regulatory Bill quickly.

The writer is Executive Vice Chairman, Milestone Capital Advisors Ltd

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