India’s First REIT Launch – Digging the Concept of REIT Investment

By CA Ankit Gulgulia (Jain) | AGA

The IPO of Embassy Office Park Real Estate Investment Trust (REIT) has marked a Landmark in Indian Inc with launch of First REIT in the Country. This REIT issue plans to raise around 4.7K Crores and backed by Blackstone group and Bengaluru Builder Embassy.

We will discuss, what is a REIT, how you can benefit from it, the Risks involved and Tax advantages of REIT in this post.

What is REIT

REIT is an investment tool that owns and operates rent-yielding real estate assets. It allows individual investors to invest using this platform and earn income.

The Securities and Exchange Board of India (SEBI) had notified REIT’s regulations in 2014, allowing setting up and listing of such trusts, which are popular in some advanced markets.

REITs are listed entities that invest in income-generating properties and distribute at least 90 percent of their income proceeds to unit-holders through dividends. After registration with SEBI, units of REITs will have to be mandatorily listed on exchanges and traded like securities.

Properties listed through a REIT are typically commercial assets that can generate steady and lucrative rental income. Even government-run buildings can be placed under REITs.

REITs offer investors, with Rs 2 lakh in capital, an opportunity to invest in the commercial real estate market. Like listed shares, small investors can buy units of REITs from both primary and secondary markets.

Tax Benefits

a) The REIT will receive income in the form of dividends and interest from SPVs. Such interest income received or receivable by the REIT from the SPVs should be exempt from tax in the hands of the REIT.

b) Dividend (interim or otherwise) declared, distributed or paid by a HoldCo / SPV, to the REIT out of its current Income, should be exempt from Dividend Distribution Tax.

The following chart illustrates the relationship between the Embassy REIT, the Trustee, the Manager and the Unitholders (which include the Sponsors)
on the listing date.

Key Points :-

a) It will be a tradeable script on Exchange and might quote at a premium or discount depending on Investor’s play.

b) Normally one can expect a rental yield of around 8-9.5% from commercial properties. The actual yield shall be combination of both rental and capital appreciation and may vary significantly.

c) You need to have a demat account to invest in these products. Retail investors may need to wait till mutual funds begin to provide these products as a part of their offering. But that is at least a few years away

Since REITs need to ensure that 90 per cent of net distributable cash is distributed as dividends, all eyes will be on the performance aspect in the initial days.

Last year foreign institutional investors like Japan’s NikkoAm-Straits Trading Asia and US’ North Carolina Fund, among others, receive SEBI approval to invest in India under REITs. It would be interesting to see how things span out.