Sunday, 17 May 2015

REITs: - Upcoming New Avenue of investment for retail Investors in Real Estate

Today the Indian Real Estate industry has reached a crucial juncture in its evolution where it requires more resources to grow. The real estate sector’s inventory has improved both in terms of quality as well as depth. We have seen many Developers now putting in place sound strategies to build a healthy spread of both Commercial as well as Residential Projects. Developers are emerging from the recent churn with relatively healthy Balance Sheets.

The advent of REITs in the Indian real estate market will allow the sector to have access to a large and healthy source of funds. It will provide the sponsor (usually a developer or a private equity fund) avenues of exit thus providing liquidity and enable them to invest in other projects.

Post clarity and implementation one can expect participation from large corporate entities. The REIT may raise funds from any investors, resident or foreign, but initially till the market develops; it is proposed that the units of the REITs may be offered only to HNIs/institutions. 

The draft guidelines restrict the size of the funds to not less than 1000 crores in single project exposures and with initial offer size of Rs. 250 crore and minimum public float of 25%. As of now the funds would be allowed to invest up to 90% of their corpus in completed, revenue generating real estate assets and distribute 90% of the earning among their investors. It is also proposed that the minimum subscription size shall be Rs. 2 lakhs and the unit size shall be Rs. 1 lakh. 

With this an investor today will have an opportunity to participate in market returns from this sector backed by professionally managed, strictly governed, high return associated managers, giving him a relative peace of mind. 

What is also comforting is to see is that SEBI has given clear empowerment to the investors by which the investors shall have the right to remove the manager, auditor, principal valuer, seek de-listing of units, and apply to SEBI for change in trustee, etc. All this comes as a welcome step for the individual investor today who having little knowledge about the markets and till now could never think of investing in the realty sector without having an appetite to own a property. 

New tax norms for Real Estate Investment Trust: Explained

For the first time clear cut provisions have been mentioned in the Finance Bill to provide for complete new taxation regime for Real Estate Investment Trust (REIT). Similar provisions would also be applicable for Infrastructure Investment Trust (INVIT). To achieve the objective of Real Estate Investment Trust to its fullest extent a new terminology “Business Trust” has been presented in the budget. Section 2(13A) of the new proposed section defines “Business Trust” which means a trust registered as an Infrastructure Investment Trust or a Real Estate Investment Trust, the units of which are required to be listed on a recognized stock exchange, in accordance with the regulations made under the Securities Exchange Board of India Act, 1992 and notified by the Central Government in this behalf. It may be noted here that the Securities and Exchange Board of India had proposed vast regulations relating to two new categories of investment vehicle namely the Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (INVIT). These regulations were also placed in the public domain long back and it is expected that the final regulation will be notified by SEBI in a short time. 

However, taking advantage of the Finance Bill the Finance Minister has come out with clear cut taxation aspect relating to income-investment model of such REIT and INVIT which are being defined as Business Trust. The following are distinctive elements of this new theme of Business Trust :-
(1)             the trust would raise capital by way of issue of units (to be listed on a recognized stock exchange) and can also raise debts directly both from resident as well as non-resident investors; 

(2)             the income bearing assets would be held by the trust by acquiring controlling or other specific interest in an Indian company (SPV) from the sponsor. 

The Government has appreciated that taxation aspect of this Business Trust need to be defined properly so that there is no ambiguity at a later stage. Hence, the Finance No. (2) Bill 2014 has proposed to amend the Income-tax Act to put in place a specific taxation regime for providing the way the income in the hands of such trusts is to be taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts. Such regime has the following main features:–

(i)              The listed units of a business trust, when traded on a recognized stock exchange, would attract same levy of securities transaction tax (STT), and would be given the same tax benefits in respect of taxability of capital gains as equity shares of a company i.e., long term capital gains, would be exempt and short term capital gains would be taxable at the rate of 15%.

(ii)             In case of capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, the preferential capital gains regime (consequential to levy of STT) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal. Further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor. The holding period of shares shall also be included in the holding period of such units.

(iii)          The income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV. However, withholding tax at the rate of 5 per cent in case of payment of interest component of income distributed to non-resident unit holders, at the rate of 10 per cent in respect of payment of interest component of distributed income to a resident unit holder shall be effected by the trust. 

(iv)            In case of external commercial borrowings by the business trust, the benefit of reduced rate of 5 per cent tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in section194LC of the Act.

(v)              The dividend received by the trust shall be subject to dividend distribution tax at the level of SPV but will be exempt in the hands of the trust, and the dividend component of the income distributed by the trust to unit holders will also be exempt.

(vi)            The income by way of capital gains on disposal of assets by the trust shall be taxable in the hands of the trust at the applicable rate. However, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder. Any other income of the trust shall be taxable at the maximum marginal rate.

(vii)           The business trust is required to furnish its return of income.

(viii)        The necessary forms to be filed and other reporting requirements to be met by the trust shall be prescribed to implement the above scheme. It is expected that in due course the Government will come up to describe reporting requirement and other details etc. 

The setting up of REIT through the process of Business Trust and getting it recognized and listed by a Stock Exchange, can be a real great idea for all those who are connected with the Real Estate Sector. So all in all REITs is an active step towards making the realty sector in India transparent and accountable and also add liquidity to the sector.

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