By: Niranjan Hiranandani, Managing Director, Hiranandani Group
What needs to be done to ensure that Real Estate Investment Trusts (REITs) get to be the game changer? In India, we have seen ‘pious thought’ and ‘positive thinking’ not always being supplemented by positive action on part of the ‘powers that be’; be they regulatory authorities or the taxation authorities. Challenges which need to be addressed include different rates at which stamp duties are levied, for purchase and sale of assets across various states in India. Potential exists; making it a reality is the challenge.
How relevant would be the introduction of REITs when it comes to providing a new opportunity to get funds for the Indian real estate industry? Consider first, that India’s real estate has struggled to reduce debt, given that interest rates are among the highest in Asia. And, also consider that REITs will provide investors an opportunity to buy into India’s real estate market – these two aspects are just the basics.
Now, let us talk numbers: assets that may qualify to be included in REITs may reach $ 20 billion by 2020, according to recent media report which quoted a global property consultant as also saying that in the first three to five years, as much as $ 12 billion could be raised. This does sound good. Doesn’t it?
Let us now focus on what makes REITs relevant to present market scenario: REITs started off in the U.S.A. in the 1960s. These are publicly traded, and are an option to pool investor money and buy real estate, including shopping malls, office buildings and rental housing. So, when we talk about India’s real estate and REITs, experts say it has the potential to grow so as to rank among the top five markets in Asia by market capitalization.
Logically speaking, in theory, India is ready for REITs. The moot question that we need to address is: what measures can make REITs a game changer in Indian real estate? Let us begin with the first serious attempt to get REITs into India.
The Securities & Exchange Board of India (SEBI) released the first draft of guidelines for REITs in 2008. The reason it never got final approval was because of a lack of clarity on taxes as also the global financial crisis which hurt the investment climate.
This brings us to the second question we must seek answers to: how can India avoid the ‘grey zones’ of policies? I think the answers are self-evident: India needs to ensure that the delay – from 2008 to 2014 – does not get repeated; and we try to make up for the lost time.
What to my mind will make this happen is the presence of ‘political will’ to create the right environment for REITs to become a successful part of Indian real estate. The new Indian Government has given REITs due importance; it is reflected not just in statements made, but also in form of positive action. Consider that SEBI has released a new set of guidelines this October, which outlines the eligibility criteria for setting up REITs. This is surely a step in the right direction.
If India can focus on the positives when it comes to REITs, and ensure that the implementation is ‘smooth’ – no potholed roads and no speed-breakers – it will definitely be a ‘smooth drive’.
My concern is whether the Indian regulatory set-up and taxation framework will ensure a smooth path for REITs in India. In the past few weeks, I have witnessed the collective enthusiasm of real estate players, regulators and investment advisors when it comes to bringing REITs to India. I hope this will also translate into actual implementation and speedy implementation. REITs represent an inherent potential that can revolutionize India’s real estate development and overall liquidity framework – that is the ‘easy to understand’ part; ensuring that it works to potential. That is the challenge.
The potential that REITs have will benefit Indian real estate to the tune of USD 10-15 billion over the long term. Whoever I have met in the international investment market, all are ‘very excited’ to see how the ‘potential’ can be converted into a ‘reality’. To my mind, this is the second challenge.
If directing flow of large-scale real estate investment from global and local markets to India is the goal, and doing it in the shortest possible time is inherent in that goal; REITs is the answer. This is an answer where some key issues need to be ‘handled right’, including the process of transferring an asset to a REIT or issues relating to levy of stamp duty at the State Government level. These are aspects where we hope we have the Government’s attention.
In theory, it looks easy to showcase the potential of REITs; in reality there are key areas that need fine-tuning before this new capital market instrument can ‘take off’. I will not repeat aspects which experts have been speaking about since the past few months. The top one, to my mind, includes tax breaks, as per the present set-up not being perceived by market players to be ‘enough’.
Then, there is the aspect of RoI. Experts have estimated that as per the present set-up, Indian REITs would have post-tax yields of 7 per cent to 8 per cent, which is lower than the Indian Government Bonds, which offer yields of between 8 per cent and 9 per cent. This is another challenge that needs to be faced.
Still on the aspect of RoI, there is the concern from experts by what percentage will rents for assets included in the REIT need to appreciate – most seem to suggest the annual appreciation will need to range from 4 per cent to 5 per cent. This again, will have to be ‘in sync’ with an increase in capital values, if one considers the aspect of how attractive REITs would be.
So, the road map is clear: India needs to work at taking REITs from the stage where it ‘shows promise’ to a scenario where it actually gets implemented and takes its rightful place as a new avenue for raising funds to meet Indian real estate investment requirements. REITs can expedite existing projects, but more important, address three perceived inefficiencies: first, increasing debt finance costs; second, locked up equity of private investors; and third, lack of international finance in Indian real estate.
We need to keep in mind that while many countries have implemented the REIT framework, not all have results that include boosting of investor confidence. It has not been the case that in all countries where these have been introduced, they have grown consistently over time. While India has the right set of parameters to fuel the growth of real estate through REITs, India will also need to work towards ensuring that the potential is fully realized.
I have high hopes, and expect the Indian Government to do the needful, and ensure that REITs lives up to its potential.