Budget 2014: How will REITs benefit the realty sector
The new gov
ernment has proposed tax incentives for REITs(Real Estate Investment Trusts) in the FY 2014-15 budget. This was an expected step from the government to encourage investment in the real estate sector. Though good in intent, the Centre however needs provide clarity on tax structure and incentives.
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.
But for this model to be a success, the taxation rules require urgent consideration. REITs will also attract lot of foreign investors to Indian market. Thus, REITs along with FDI will now be the primary sources of funding in the real estate sector.
Talking to CommonFloor about the significance of REITs, Jasmeet Chhabra, managing director, Red Fort Capital says, “Introduction of REITs will provide a new source of capital to increase the stock of investment grade commercial office space while at the the same time providing an avenue to retail investors to participate in the growing commercial real estate market. However, given that the total supply of investment grade office space in India which would qualify for REITs is less than 30 per cent of the total stock, it may lead to an asset bubble in the short to medium term.”
Who will be benefitted?
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. Since REITs invest only on completed income generating assets, this will give a much-needed fillip to the commercial real estate, which since past five-six years have been stagnant due to a myriad factors.
Thus, developers such as DLF, Prestige, Phoenix, Raheja, Embassy etc. with high number of commercial assets will be largely benefitted. But currently according to SEBI regulations, the minimum asset size should be Rs 1000 Cr to ensure only the entry of large assets and established players into the market. Currently, the minimum unit size according to SEBI regulations is Rs 1 lakh the minimum subscription amount is Rs 2 lakh. But SEBI proposes to test it initially with some informed investors. Also, NRIs who are looking for an investment opportunity in real estate with transparency in the money can opt for REITs.
According to the recent Budgetary allocations, urban, rural housing and development of smart cities is given a high priority. The main cause for the government to introduce REITs in India is to facilitate the development of smart cities, urban and rural housing policies.
