Budget 2014 : Impact of REITs in Real Estate

In order to reduce the pressure on existing bank lending, the government has decided to provide necessary incentives for REITs. As per the Union Budget, several tax incentives for REITs coupled with infrastructure worth Rs 7600 cr that is planned for 10 cities is expected to help the sector in a significant way.

Real Estate Investment Trusts (REITs) in India are set up as a trust under the provisions of Indian Trusts act, 1882. These are the Real estate platforms, in which an individual or a group of investors can invest their money to buy assets to produce regular incomes. REITs are highly successful in countries like United States of America, Singapore, Japan, France, United Kingdom etc. The need for the REIT’s was felt in India because of the rapid growth in real estate sector which contributes to 17.2 percent of the gross domestic product the second highest after agriculture.

REITs will give an opportunity to people who would like to invest in commercial real estate. REITs invest only on the completed projects due to which the risk of construction and completion of project is avoided. With REITs in place, builders and developers will have a source of funding and public will get opportunity to invest in those projects. So REITs will increase the overall real estate capital, facilitating the private developers in construction.

Investments by REITs will also indirectly reduce the exposure of banks to risky assets as they have provided construction finances to many projects. These will reduce individual speculation in real estate assets and allow for more professional investment and management in the sector which boosts up the Indian real estate market. Further, REITs, as an investment tool, should be made attractive and viable for investors from varied classes (corporates, individuals etc.). The format should be tax efficient for which relevant changes would be required such as exemption from tax on income received by REITs etc. Incentives like these will work in favour of commercial real estate development which has been lying low since several months.

REITs will help the real estate industry grow and create transparency in the long run in the Indian real estate market. REITs will also help in reducing the amount of black money in this market by bringing greater transparency through legitimate funding.