Top 3 Questions on REITs in India Answered by Diwakar Rana, Managing Director for Capital Markets, Cushman & Wakefield

In February, the Union Budget announced the removal of the Dividend Distribution Tax (DDT) on Real Estate Investment Trusts (REITs) – a huge incentive towards facilitating REIT investments in India. USIBC Policy Manager for Real Estate, Hemal Shah, spoke with Diwakar Rana, Managing Director for Capital Markets at Cushman & Wakefield in India, on what this means for the investment community. Please find below top three questions excerpted from Mr. Rana’s a detailed presentation to USIBC members over a webinar on May 3, 2016.

What are the key features of a REIT? 

A REIT in India could be characterized by 6 key features:  

  • REITs are required to distribute a minimum of 90% of net distributable cash flows to the unit holders once in 6 months.                 
  • At least 80% of the funds should be invested in completed and revenue-generating real estate assets, the remaining 20% can be invested in under construction projects. This will enable real-estate developers to raise funds for their upcoming projects.
  • To reduce risk, REITs are required to invest in a minimum of two projects and not more than 60% of the fund value can be invested in a single project.
  • The current REIT Regulation allows foreign investors to buy units of a REIT. 
  • It is mandatory to list all units of the REIT on a recognized Stock Exchange.
  • A minimum of 25% of the value of REIT should be offered to as public float.

What is the Government of India doing to make REITs listing a reality, and what are the bottlenecks that remain? 

  • The government has made several amendments to the REIT framework in India since its initial plan in 2007 to help make REITs a reality. Two key recent amendments include the following:
  • In February 2016, the government announced that the distribution made out of the income of the Special Purpose Vehicle (SPV) to the REIT will be exempt from the Dividend Distribution Tax (DDT), which was earlier applicable at 15%. 
  • In February 2015 – last year’s budget - Government of India gave a pass-through status for rental income generated by REITs, which means that income would be taxed in the hands of the investor rather than the fund itself.Although the stage is set to realistically expect the first REIT listing soon, two other critical issues — exemption from capital gains tax and state governments' stamp duty while transferring assets to REIT's holding company — remain.

What are the top asset classes for REITs and policy reforms that could help stakeholders capitalize on these asset classes? 

The completed and leased assets within the office and retail segment are expected to attract the largest share of REIT investments. Bangalore currently has over 103msf of REIT eligible office space that has been completed and leased. With vacancy rates at city level being only about 7.5% and high demand from the IT/ITES sector, Bangalore might prove to be one of the most attractive investment destinations for REITs in India. Other opportunities would be predominantly with large developers such as DLF, Unitech, Oberoi, K. Raheja, etc. that have several fully leased (100% occupied) projects in Delhi NCR and Mumbai.  The two cities (Delhi NCR and Mumbai) cumulatively have about 106msf of REIT eligible completed office spaces.

The retail segment, especially malls owned by large developers such as Phoenix, K. Raheja, DLF, Prestige, etc. may also prove to be attractive, as malls generate higher rental incomes as compared to office spaces. Moreover, most of the malls of the above mentioned developers have low vacancy rates and have high demand from retailers. Mall spaces owned by some of the large mall developers include:

  • Phoenix has about 5.3msf of gross leasable area (GLA) spread across Mumbai, Pune, Bangalore and Chennai
  • K. Raheja has 2.5msf of GLA across Mumbai, Pune, Hyderabad and Bangalore
  • DLF has about 5.2msf  GLA across Delhi NCR, Hyderabad and Kolkata 
  • Unitech as about 2.1msf GLA in Delhi NCR