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Realty investment trusts far away

Real estate investment trusts are mutual funds where investors pool money to buy property

Raghavendra Kamath & Samie Modak  |  Mumbai 

Real estate investment trusts (Reits) aren't likely to be launched in India within at least a year.

Reits are similar to real estate mutual funds where investors pool money to buy real estate assets; investors earn dividends through rental income. Reits, which can be listed on stock exchanges, enjoy tax benefits as these distribute most of their profits as dividend to shareholders.

Sources in the Securities and Exchange Board of India (Sebi) have indicated the proposal to allow such instruments isn't being actively considered. However, there is a window under the newly-framed alterative investment fund (AIF) regulations that could allow investments in special purpose vehicles investing in properties. Sebi is considering providing some relaxations to such AIFs.

What is an REIT?
  • Real estate investment trusts are mutual funds where investors pool money to buy property. Investors earn dividends through rents. These can be listed on stock exchanges and enjoy tax benefits as they distribute majority of their profits as dividend to their shareholders
What are the hurdles?
  • Regulations, including those relating to valuation and taxation, have held back the launch of Reits, say real estate private equity players

In 2008, Sebi had issued draft guidelines for real estate mutual funds, which were later withdrawn.

In the absence of such trusts in the country, Indian such as Indiabulls had launched listed property trusts in Singapore.

At an Asia Pacific Real Estate Association event on Reits held here on Saturday, real estate private equity players said regulations related to valuations, taxation, etc, had held back the launch of Reits. "Indian real estate assets do not meet existing regulations such as daily publishing of NAVs (net asset values). Nowhere in the world have Reits worked without a tax pass-through status. Here, income tax rules do not have that provision. Unless the government takes such steps, the launch of Reits will be difficult," said S Sriniwasan, chief executive officer, Kotak Realty Fund.

Rahul Rai, head (real estate investment business) at ICICI Prudential Asset Management Company, said, "There is an issue of multiple taxation in Reits. That needs to be addressed. It will take nine-12 months before Reits will become a reality," Rai said.

"Though it is perceived to be less risky, there will be market risks such as rental fluctuations and vacancy."

Simon Taskunas, partner at a Singapore-based commercial law firm, said many of his clients were closely following the events in India on the Reit front. "Any new Reit law in India should draw upon and be largely consistent with the Reit laws in Asia-Pacific which international investors are familiar with. This will equip India with an appropriate framework to attract foreign sponsors and investors into the new Reit regime," he said.

First Published: Sat, August 24 2013. 23:34 IST