This article is republished with permission from REITCafe.
More than 55 years after the REIT Act title was signed into law as part of the Cigar Excise Tax Extension of 1960, India’s first real estate investment trust (REIT) is slated for an initial public offering (IPO). The deal marks a breakthrough for the REIT market, even though it is unlikely to list on the exchange until early 2017.
In 2014, the Securities and Exchange Board of India (SEBI) established REIT regulations, and the tax code was amended to create a tax pass-through status. However, other regulations made REITs impractical. Recent reforms, including the removal of several barriers to REIT formation, will allow REITs to move forward and make foreign investment in India more attractive.
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The government is removing the dividend distribution tax (DDT) that has been a significant roadblock to the formation of new REITs. REIT rules were also eased this year to allow 20 percent investment in projects that are under construction, up from the previous 10 percent maximum. The thinking behind that bump is that new REITs will help finance the country’s significant pipeline of new office development. The government relaxed unitholder consent on related party transactions and broadened the definition of real estate so that it now includes hotels and hospitals. It is also permitting REITs to invest in holding companies with a multilayered ownership structure. These moves enable commercial developers to receive lower-cost equity funding instead of relying on expensive debt.
DLF and Blackstone are vying to be the first to issue a REIT in India. The nation’s largest developer, DLF, is looking to establish a REIT to divest a 40 percent stake in its rental arm called DLF Cyber City Developers. Blackstone Group has REITs planned with two local partners. It made headlines in September by announcing plans to raise about $600 million through an IPO along with its partner, Bengaluru-based Embassy Group. Blackstone and another partner, Pune-based Panchshil, also are planning a REIT listing. A bit further out, Bengaluru-based RMZ is also looking to list a REIT during the second half of 2017.
Establishment of a REIT market will boost domestic and international investment in real estate and will help institutionalize high-quality real estate assets within India. Real estate markets will become more transparent because REITs will be required to report their financial results. Access to capital will improve for cash-strapped, highly leveraged real estate developers in a nation with one of the highest interest rates in Asia.
Through REITs, India’s property companies will be able to lower their cost of capital, but high interest rates also make it challenging to attract investors. Unlike the United States, where REITs’ strong dividend yields have made them very popular in the current low-interest-rate environment, India’s investors already earn high interest rates. This makes the recent reforms all the more necessary to spur REIT formation.
Within several years, it is estimated that the Indian REIT market could grow to a valuation of at least $20 billion. Even with that rapid expansion, India is unlikely to become a REIT powerhouse similar to other Asia Pacific nations such as Australia, Japan, and Singapore.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 9/30/2016.
