Indian Regulator Approves REITs to Streamline FDI into Burgeoning Property Market

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DELHI – On Sunday, India’s capital market regulator, The Securities & Exchange Board of India (SEBI), in a long-awaited announcement, revealed the guidelines for real estate investment trusts (REITs), as well as infrastructure investment trusts (InvITs).

The listed entities will function similarly to mutual funds, allowing developers to raise resources from investors that can be directly invested into realty and infrastructure projects.

“If somebody creates a Special Project Vehicle (SPV) and has made an investment in a real estate project, units of that will be used to form the REIT and that Trust will issue shares” explains U K Shinha, SEBI Chairman.

The move, intended to raise much-needed funds for the two sectors, will also provide a market option to investors keen to invest in property but lacking the capital needed for physical real estate assets such as land or buildings.

“REITs are an avenue through which retail investors can invest in an asset class connected to real estate,” said Hemal Mehta, senior director of consulting firm Deloitte Touche Tohmatsu India. “This structure gives the option for developers to either exit or dilute their stakes in the commercial properties and give an entry to investors for regular income flow.”

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India’s notoriously unfriendly taxation structure had delayed the launch for six years, but the promise of tax benefits made by Bharatiya Janata Party (BJP) finance minister Arun Jaitley in his July budget announcement helped pave the way for the new instruments.

Now the income generated will be taxed only in the hands of the investors. Furthermore, SEBI has promised to allow stockbrokers and clearing members to obtain a unified registration for doing business in all the stock exchanges and depositories in the country, vastly streamlining the registration process.

To ensure that system remains low risk, under the new guidelines REITs must focus on commercial real estate, with no less than 80 percent of assets to be invested into completed and revenue generating properties.

The minimum asset pool requirement has been reduced to 5 billion rupees (US$81.78 million) and at least 2.5 billion rupees must be available for issue to shareholders.

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Since his landslide election in May, Navendra Modi’s BJP has shown time and time again that they are true to their word about creating a more business friendly India. And now with the opening up of the rapidly growing Asian giant’s lucrative property market, foreign investors are right to be excited.

“We will definitely see foreign investors investing in Indian real estate. It will also help developers in raising fresh equity from stock markets, which has been closed for [the] last few years,” said Jones Lang LaSaelle India chairman and country head Anuj Puri. “About US$8-10 billion is expected to be raised through REITs over the next five years.”

Meanwhile, analysts at property broker Cushman & Wakefield estimate that investment worth some US$20 billion could be generated by 2020.

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