Sebi's draft Reits norms to benefit realtors with large leased assets

DLF, Prestige Estates and Phoenix Mills among those who will benefit; $60 billion of commercial assets could become Reits, says Morgan Stanley

The Securities and Exchange Board of India’s (Sebi) draft regulations on real estate investment trusts (Reits) could benefit listed firms such as DLF, Prestige Estates and Phoenix Mills as well as unlisted ones such as K Raheja Corp and Embassy group, which have large rent-generating assets.

According to analysts, these realtors would get a new avenue to cash out their assets by floating Reits and listing on the stock exchanges. India has 400 million sq ft of office and mall properties valued at $60 billion (Rs 3.72 lakh crore), according to Morgan Stanley.

“Earlier, developers could either go for private equity funding, strata sales or rental discounting. Now they can float their own Reits and float them on exchanges,” said Ambar Maheshwari, managing director, corporate finance at Jones Lang LaSalle.

Reit is an investment vehicle that invests in real estate assets to generate income. Reit can be listed and traded on the stock exchange as well.

Sebi’s announcement on draft Reit guidelines propped up BSE Realty by 2.66 per cent on Friday, while Sensex rose 1.26 per cent.

DLF has 28 million sq ft of rental space, Morgan Stanley analysts Sameer Baisiwala and Harshal Pandya said in a report on Friday. “Given DLF’s high leverage and limited success in monetising its non-core assets, REITs could provide new avenues to raise funding to help it reduce debt. However, this might take a few months to a couple of years to play out.”

Rajeev Talwar, executive director, DLF said: “It will make real estate sector more transparent and market-oriented, besides opening new equity route for developers.” On whether the company would float a Reit, he added: “It is part of our corporate strategy, which has to be decided when things become clear.”

Mumbai-based Phoenix Mills has over eight million sq ft of mall properties. Anlaysts said Phoenix, too, could look at Reit because it has a large portfolio of leased assets.

Samantak Das, chief economist and director (research) at Knight Frank India, said Reits will give financing and exit options to developers and avenues for investors. “The timing of this move is also very important, keeping in mind the prevailing paucity of funds coupled with the ongoing slowdown in the economic growth.”

According to S Srinivasan, CEO of Kotak Realty Fund, now that Sebi has delivered on its part, it is up to the government to focus on the tax regime and get it done to really kick-start the market.

“A Reit pays tax on rents and they pay tax while distributing profits. This leads to double taxation. Reits are tax-free structures the world over. This issue needs to be addressed,” said Adidev Chattopadhyay, an analyst with HDFC Securities.

Chattopadhyay added that levies such as stamp duty add to transaction costs, which reduce the valuation of Reits.