India gives green light to REITs

India’s capital markets regulator has approved the setting up of real-estate investment trusts (REITs), a much-awaited move that offers an alternative exit route to domestic and foreign private real estate funds.  

The Indian government has approved the implementation of a REIT regime for the country.

In a statement released this week, the Securities and Exchange Board of India said the minimum value of the assets a REIT needs to have, to float an initial offer, will be 5 billion rupees (€61 million; $82 million).

The trusts will be allowed to invest in commercial real estate directly. To ensure their accountability, REITs that acquire real estate via special purpose vehicles must hold a controlling interest of at least 50 percent, said SEBI.

The purpose of introducing REITs is to offer investors a tax-efficient and low risk conduit to investments in completed, income-generating real estate assets, thus providing stable rental incomes to shareholders. Like stocks, REITs are listed and traded on the stock exchange.

As per the guidelines stipulated by the Indian government, apart from in various special economic zones, foreign direct investment is permitted only in under-construction assets, which makes it difficult for foreign private funds to acquire completed and tenanted real estate. Buying into REITs is one way they will be able to do that.

While that will be a welcome evolution, the establishment of a REIT regime will also be welcomed by private equity real estate firms as it offers them another route for exiting investments.

Sachin Shah, founder and managing principal of one such Mumbai-based private equity real estate firm, Samsara Capital, welcomed the announcement as positive news for both commercial and retail assets. “[Till now] retail assets really did not have an exit apart from a sale to a third party or a listing abroad. This is a huge benefit,” he said.

In another reaction, Khushru Jijina, managing director of Piramal Fund Management, one of India’s larger real estate fund managers, said: “In the first instance, REITs provide an appropriate exit mechanism that can and will be used by existing owners of assets to monetize their investments.”

But he warned: “For those participants who may not already own the assets, adoption of the guidelines would necessarily be predicated by an increase in general asset availability. There are more late stage or last mile construction assets available in the market today than there are fully completed or leased assets that have not already been traded or spoken for.”

Plans to introduce REITs began in October last year, but uncertainty about its tax structure delayed their implementation. In the country’s annual finance budget last month, the finance minister, Arun Jaitley set the ball rolling by announcing tax benefits for the investment vehicle.

Shah predicted the advent of REITs would bring about a more stable benchmarking for performance in Indian real estate. He said: “I am hopeful that the first few REITs are from larger groups to help create a baseline for an institutional product. There shouldn’t be a rush of smaller developers rushing and listing very small assets.”

India’s decision to open the REIT market follows a similar move by China, which in April, approved the country’s first property trust.