It may take much longer for real estate investment trusts (REIT) to launch in India, with top realty firms and private equity (PE) funds finding the current tax structure unviable, despite the sops and incentives introduced in the recent Union budget. Experts say there is a slim chance the FINANCE ministry may introduce an interim tax relief for REITs, but most believe the wait for an efficient tax structure will probably last till next budget.
While the FINANCE minister proposed to rationalize the capital gains regime for sponsors exiting at the time of listing of units of REITs, subject to payment of securities transaction tax, matters such as minimum alternate tax (MAT) and dividend distribution tax (DDT) have not been addressed. “While the overall sentiment of the budget was good, it doesn’t look encouraging as far as REITs are concerned because of the tax inefficiencies,” said Mike Holland, chief executive officer, Embassy Office Parks, the entity under which global private equity fund Blackstone Group Lp and partner Embassy Property Developments Pvt. Ltd have aggregated an office asset portfolio valued at an estimated $2 billion.
The partners were earlier looking at a possible end of 2015 listing of their REIT if the budget had the right kind of tax incentives. Holland said that there are around 34 REIT markets around the world that have a fairly standard tax pass-through structure. REITs are listed entities that primarily invest in leased office and retail ASSETS, allowing developers to raise funds by selling completed buildings to investors and listing them as a trust. REITs will also give foreign investors a chance to invest in lease rental generating assets, an asset class otherwise prohibited for foreign investments. The 2014 budget took the first step in encouraging the trusts by providing a partial pass-through to them.
Senior executives of K Raheja Corp. Ltd and Phoenix Mills Ltd said that in the current form, REITs don’t seem very attractive. Atul Ruia, joint managing director, Phoenix Mills, which has a sizeable portfolio of shopping malls, said REITs don’t look like a completely workable option as of now.
However, this year, the firm is working on its first commercial mortgage-backed securities issue, a process by which it will raise debt against some of its assets. “We have not exempted any particular sector from MAT. There was huge demand even from special economic zones (SEZ) for exemption from MAT. In the case of dividend distribution tax also, which has been demanded for REITS, no particular sector has been exempted,” said a senior FINANCE ministry official, who did not want to be identified. “Once you start the process of exemption, it becomes endless. There are huge revenue implications involved. We get more than Rs.37,000 crore from MAT in a year,” the official said. “On REIT and infrastructure INVESTMENT trust, the pass through is clear; but at the special purpose vehicles (SPV) level, there is some problem. The issues posed to us were about the rental income and the sponsors’ capital gains. Both those issues have been addressed.
The industry has now raised some more concerns. We will look into it,” said a senior official from the income tax department, who did not want to be identified. Another firm working on a REIT listing is Bengaluru-based realty firm RMZ Corp., backed by sovereign wealth fund Qatar INVESTMENT Authority. “Since our scheduled listing is in the first quarter of 2016, we need more tax breaks in the next budget to come, in line with the internationally-listed REITs in other countries. We have no plans till then,” said RMZ’s managing director Raj Menda. DLF Ltd, which has a massive office portfolio, has been seriously looking at a REIT as a way to monetize its ASSETS. Rajeev Talwar, executive director at DLF, said the firm is focused on a REIT listing.
“Along with rate cuts by RBI this year, we are certain to move ahead. Bankers have been appointed for the purpose. In our talks, it has emerged that removing residual ambiguity around MAT will be a nailing factor for establishment of REITs and usher in INVESTMENT by FIIs (foreign institutional investors), and later by retail investors,” said Talwar. “As per provisions, MAT will be applicable on exchange of units against shares of SPV, despite the capital gains exemption given to sponsors of REITS. This despite the fact that though there is a book profit, there is no cash flow,” said Zulfiqar Shivji, global liaison partner and head of transaction advisory services, BDO India LLP. “This will not help big developers much who are starved of cash.”