Budget 2015: Capital gains regime for REITs
Investment Trusts such as REITs and InvITs will benefit with the recent announcement in the budget. This Budget has spelt good news for REITs by rationalising the capital gains regime for the sponsors while exiting the investment trust. Moreover, the rental income which is being generated through the assets owned by REITs and InvITs are now proposed to be taxed. This is expected to bring a much-needed financial stability in the markets.
Additionally, the Finance Ministry is also considering to amend the Foreign Exchange Management Act (FEMA) to permit overseas funds in real estate investment trusts (REITs).
Why REITs?
REITs will act as the investment vehicle between investors and developers.
It is a safe investment in real estate considering the fact that REITs will only invest in the properties which are completed and income generating. This is a major advantage for investors because they do not have to worry about completion of the project or success of the project. REITs as an investment tool will benefit both investors and developers.
The investors now have a regularised platform to invest in real estate and derive profits through it.
How will REITs help real estate funding?
REITs pool capital from investors to purchase and manage income-yielding real estate assets or
mortgage loans and can be traded on major stock exchanges like normal stocks. REITs are expected to attract big-ticket funds to the real estate sector and help make it more efficient and transparent. These instruments would also enable banks to free up their balance sheet by reducing loan exposures and creating head room to finance fresh projects. The formation of REITs will encourage the creation of big-ticket institutional-grade buildings, and will give developers a ready outlet for development projects. Indian REITs, like many others around the world, will be required to pay out 90 percent of their income from stable assets to investors. That will result in a twice-yearly dividend. It makes REITs perfect “widows and orphans” stocks since they spin off cash regularly and are relatively low-risk.
Only 20 percent of an Indian REIT’s assets can be invested in development, the riskiest end of the real-estate industry or in cash and cash equivalents for liquidity management, with a maximum of 10 percent for the former. The remaining 80 percent of the fund’s assets must be invested in income-producing property. Since those projects – often office buildings or shopping malls – have already been developed and already have tenants, their income stream is relatively easy to predict. While they may increase in value, the REIT will hold them long-term and won’t trade in and out of real estate.
2014 FLASHBACK
In the previous year’s budget announcement, the government had proposed to provide tax incentives to the REITs, promoting foreign investment in real estate sector, facilitating the cash-strapped developers with capital.
