REITs to lure investors with tax-free dividends and capital returns

Mindspace gives 90% of returns; Brookfield, Embassy to follow suit

Brookfield India REIT (real estate investment trust) and Embassy Office Parks REIT plan to offer more tax-free dividends and capital returns in the coming years in a bid to entice more inves­tors by providing them higher yields.

Mindspace REIT already distributes over 90 per cent of returns in the form of tax-free dividends, and Embassy and Brookfield have announced measures to improve the tax-free share of dividend plus capital return for their investors. They can distribute up to 90 per cent of their profits as dividend to their investors.

For Embassy REIT, simplifying the structure of Embassy Manyata from financial year 2021-22 (FY22) along with injection of the TechVillage property in December 2020, may lead to a higher share of over 70 per cent in the form of tax-free dividend plus capital return for FY22-23, said Adhidev Chattopadhyay, vice-president of equity research at ICICI Securities.

For Brookfield REIT, the manager has now converted compulsory convertible debentures (CCDs) having face value of Rs 1,010 crore to equity in the Candor Kolkata special purpose vehicle, and Chattopadhyay expects over 30 per cent of the distri­bution to be in the form of tax-free dividend and capital return from FY22, as against 15 per cent earlier.

“In line with our thinking, we have taken steps to enhance the tax efficiency of our distributions and make it more appealing for a wider variety of investors. Future growth in distributions will further enhance the tax-free percentage,” Brookfield India REIT said in a recent presentation.

Mike Holland, chief executive officer, Embassy REIT, said to enhance the tax efficiency of its distributions and overall post-tax distribution yields to unitholders, the REIT has completed the restructuring and rationalisation of ownership of a number of its portfolio assets.

He said the simplified holding structure of Embassy Manyata has increased the tax-free component of distributions to 78 per cent for Q4FY21. Further, it has initiated a similar process for its newly acquired Embassy TechVillage assets and expects this to be completed by September.

Chattopadhyay believes yields in Brookfield India REIT will rise from 6.5 per cent in FY21 to 9.1 per cent in FY23. Brookfield refused to comment on this.

Yields in Embassy REIT are expected to rise from 6.7 per cent in FY21 to 7.8 per cent in FY23.

“We expect the three REITs to offer distribution yields of 7-9 per cent over FY22-23E along with 13-18 per cent capital appreciation as per current target prices. While a rise in global interest rates is the key risk, cumulative potential returns of 20-25 per cent provide an adequate valuation cushion, in our view,” Chattopadhyay said.

Maadhav Poddar, partner, private client services-real estate at EY India, said the current tax framework for REITs permits tax-free distribution of dividend and amounts that are not revenue or income. “This enables a higher distribution by a REIT to its unitholders. Investors in REITs expect a regular income if the REIT is able to achieve a higher distribution to its investors, it is definitely more beneficial to investors.”

While REITs and InvITs are equity products, they are compared to investment in fixed deposits. In such a comparison, even if returns are identical, the beneficial tax regime will result in the investor getting a higher absolute return in case of a REIT, thereby making it a more attractive avenue to park savings, Poddar said.

Shobhit Agarwal, managing director and CEO, Anarock Capital, said REITs are quite safe for conservative investors as they are less volatile than other asset classes like the stock market, FDs, and mutual funds. “Secondly, even in the prevailing pandemic scenario, REITs are offering good RoI with at least six per cent returns after all deductions…and that too risk-free in the prevailing times,” he said.