What is REIT
Real
Estate Investment Trusts (REITs) are similar to a mutual fund wherein investors
pool funds which are invested by the sponsor of the scheme into the real estate
asset class which acts as the underlying securities. However, the working of a
REIT differs a lot. During the launch offer, an investor may buy REIT units
which can then be traded on the stock exchanges and thus ensure liquidity. As
per the rules, the minimum allotment will be in multiple of one lot each
consisting of 100 units and after listing trading will be in multiple of one
lot. The REIT shall issue units only in dematerialized form to all the
investors.
The
minimum subscription amount in REIT has now been reduced from the earlier limit
of Rs 2 lakh to Rs 50,000.
India’s first REIT
The
first REIT IPO by Embassy Office Parks, a
Bangalore-based real estate developer backed by Blackstone Group LP, a global
private equity firm, was open for investment between March 18 and 20, 2019. The
Embassy Office Parks REIT raised ₹4,570 crore through the IPO. The per unit
price of the REIT has been kept in the range of ₹299-300, with the minimum
application bid of 800 units. This means that an investor will have to invest
at least ₹2.4 lakh in this product. Thereafter, one can increase the lot size
in multiples of 400 units. As on 26th April'19 closing price of it was Rs. 327 per
unit.
Where it invests
As
per SEBI guidelines, REIT shall hold at
least two projects, directly or through SPV, with not more than sixty per cent
of the value of the assets, proportionately on a consolidated basis, in one
project. Further not less than 75 per cent of the revenues of the REIT and the
SPV, other than gains arising from sale of properties, shall be, at all times,
from rental, leasing and letting real estate assets or any other income
incidental to the leasing of such assets.
The
investment can be made in under-construction properties, ‘completed and not
rent generating’ properties subject to caps and conditions. REIT is also
allowed to invest in listed or unlisted debt of companies or body corporate in
real estate sector, mortgage backed securities, equity shares of listed
companies, money market instruments and government securities amongst others.
Expected Returns from REITs
As
per guidelines minimum 90% of net distributable cash flows of the SPV shall be
distributed to the REIT. Further, not less than 90% of net distributable cash
flows of the REIT shall be distributed to the unit holders; and any such
distributions shall be declared and made at least once every six months in
every financial year.
As a REIT
investor, the earnings may be in the form of regular income and capital
appreciation, if any. In Indian scenario, most industry experts expect return
of about 8-12% percent from the REITs.
How REITs are
taxed
How
the income gets taxed in your hands depends on whether your REIT is passing it
off as a dividend income or rental income.
Scenario 1: If it’s
the rental income that it is passing on- which would mostly be the case since
REITs are meant to pass on at least 90% of its rental income, then it will be
added to your overall income and get taxed at your income-tax rates. In this
case REIT will deduct a tax at 10% (TDS) for resident investors and at rates in
force (40%, at present) for non-resident investors
Scenario 2: If the income distribution is in the nature
of a dividend, then there won’t be any dividend distribution tax or any tax in
the hands of unitholders.
Capital Gain Tax:
If
you sell your REIT units on the stock exchange after three years, you will need
to pay a capital gains tax at 10% (plus applicable surcharge and cess). If you
sell your REIT units within three years, a short-term capital gains tax of 15%
(plus applicable surcharge and cess) will be imposed.
Things to look beyond
· Returns can’t be
very high as dividend yield might be between 6.5 and 8 percent. Even the
capital appreciation can also be limited to single-digit.
· Another concern
is over the liquidity of these instruments. As REIT is a new product and it takes
time to catch up. Hence there may be low liquidity in the secondary markets.
·
REITs are best
considered as a means to diversify your portfolio across asset classes than for
earning higher returns.
And Finally:
Real
estate has always been considered an illiquid and a big-ticket investment.
REITs provide an opportunity to diversify across real estate as an asset class.
REITs are primarily a hybrid investment seeking capital appreciation and even
income (rent) from the underlying securities of the sponsor. With twin benefits
of REIT and the rules in place, one should expect the REIT to provide a new
investment option to the Indian investors.
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