Budget leaves REITs in no man's land

Real estate companies looking to list their commercial real estate assets haven’t had their task made any easier. Arun Jaitley’s Budget only catered to a tiny sliver of their expectations.

First, the good news: Developers listing their commercial assets as REITs (real estate investment trusts) will get a one-time exemption on capital gains when the trust lists. So far, the preferred route for developers has been private equity players. (Blackstone has been a particularly aggressive buyer of office buildings around the country.)

The industry has, for some time now, been asking for dividend payouts for REITs to be granted pass through status. What this means is that the rental income from such assets will not have any tax liability when returned to the investors or unit holders. Usually, countries do not do tax payouts by REITs as long as 90 percent of the profits are returned.

In a country where the fascination for real estate (and gold) runs deep, it had been hoped that REITs would provide retail investors with another avenue of investing in real estate. Unfortunately, that is still some time away.

Small retail investors are unlikely to bite. “For domestic investors it will be a non-starter,” says Abhishek Goenka, partner, BMR and Associates LLP. Commercial assets in India yield 8-9 percent which is about the same as bank deposits and other debt instruments. With the same yield, retail investors are unlikely to be buyers.
 
Foreign investors could still bite though. Rental yields in India are among the highest in the world. The supply of Grade A office spaces in metropolitan clusters has increased considerably in the last five years. And with stability having returned to the rupee, investors can forecast their returns much more easily.