No Reits before next Budget, say developers

Point to problems in tax issues with such vehicles, lack of clarity on rules and the alternatives available

Real estate investment trusts (Reits) will not be a reality till at least the next Union Budget, say top real estate developers.

Reits are pooled investment vehicles which can be used to invest in real estate. The majority of their income is distributed as dividends. The Securities and Exchange Board of India has approved the final guidelines but is yet to notify these.

Developers said various tax issues make Reits unviable for them at present. They’re uncomfortable with the long-term capital gains (LTCG) tax they would have to pay once they sell their units in a Reit. Unlike retail investors, who are exempt from the tax, developers need to pay a LTCG tax of 20 per cent if they hold their Reit units for longer than 12 months.

Another point they raise is of stamp duty on transfer and purchase of properties. They say exemption from these would have helped make Reits more attractive.

The government has announced a tax pass-through for  dividend distribution tax (DDT). However, experts said a Special Purpose Vehicle owning a project is subject to corporate tax and the dividend paid by the SPV to the Trust is also subject to DDT.

“I do not think any real estate company will want to come out with Reits now. Tax issues have to be worked out first,” said Rajeev Talwar, executive director at DLF, the country’s largest developer, with 28 million sq ft of leased assets.

“Developers will at least wait for the next Budget before launching Reits,” said Sunil Hingorani, director (finance) at K Raheja Corp, one of the country’s largest owners of commercial property.

Beside tax issues, developers say launching of a Reit will involve several time-consuming processes. “We have to first value the completed assets, bring bankers on board to manage the entire process, study the market conditions and so on. It will take at least six months,” said Talwar.

“We do not have enough clarity on Reits. We are studying whether it is really worth launching it,” said Atul Ruia, managing director of Mumbai-based Phoenix Mills. He said they were working with consultants to study the benefits.

DLF and Raheja Corp have already raised funds through commercial mortgage-backed securities (CMBS), which carry lower rates and require the principal amount to be paid towards the end of a loan tenure. Phoenix Mills is also exploring the options of launching CMBS.

“We prefer CMBS to a Reit,” said Talwar. Referring to the recent CMBS issued by DLF at 10.9 per cent, Samar Sarda, an analyst with Kotak Institutional Equities Research, said: “We believe a developer would be more comfortable raising debt and keeping the property appreciation for himself if debt is available at the current rate (11-12 per cent).