In an attempt to draw foreign investments into India, regulators are keen to bring Real Estate Investment Trusts or REITs into the country. REITs are a big hit with investors in countries, such as Singapore. But industry players say that the Indian property market is not ready for REITs yet.

Here is why. New rules for Real Estate Mutual Funds, an earlier incarnation of REITs, were introduced by SEBI in 2008. But not a single REMF was launched. This was thanks to a rule that these funds had to declare their daily net asset values or NAVs. Valuing property is difficult as it is illiquid and localised. Also, the regulator had not provided any uniform guidelines for valuation. “This discouraged the trusts since daily NAV declaration is neither practical nor feasible,” says Om Chaudhry, Founder and CEO, FIRE Capital.

Nor was there clarity on the tax breaks for these special purpose vehicles. REITs, in other countries, are required to distribute at least 90 per cent of their annual profits to investors as dividends. The basis of taxation for dividends or capital appreciation from Real Estate Funds was not stated last time around, deterring investors.

Rules apart, the nature of the market makes it difficult to run a REIT, feel market participants. “Transaction costs, such as stamp duties at the State level range from 5-15 per cent and long-term leases are subject to high stamp duty levels in many States,” says Shrinivas Rao, CEO-Asia Pacific, Vestian Global, a real estate consulting firm.

Favourable regulation

SEBI is now considering reviving REITs on the Alternative Investment Fund (AIF) platform, according to sources. The likely variation from real estate private equity funds (also under AIF) is that while investments are made in units of a real estate fund, REITs would allow investors to invest directly in real estate assets. The industry is expecting that the issues of valuation, taxation and transaction costs are addressed in the new guidelines.

While it is essential to fix known issues in the original regulation, additional clarifications are called for to boost interest in REITs. For instance, permissible investments by foreign investors need to be spelt out. Nitin Goel, Partner, Real Estate Investments at Milestone Capital, said the regulation must lower the size of built-up assets for trading by foreign investors.

Retail investors are shut out of the AIF platform, as it has a minimum investment limit of Rs 1 crore. Sunil Rohokale, CEO & MD, ASK Group believes that opening REITs to retail investors and enabling endowment funds and provident funds to enter the fray will help propel the growth of REITs.

However, regulatory changes alone cannot attract FDI. The success of REITs calls for changes in the country’s property market.

The primary issue is the lack of transparency in the market which makes it difficult for institutions to operate. For instance, there is usually a wide gap between market price and guideline value in many markets, causing difficulties in transacting and valuing properties.

Other issues include lack of a market regulator, which is being addressed by the Real Estate Regulatory Bill. The market is still evolving and Goel pointed out that there is currently limited availability of built-up assets and liquidity, leading to lower market breadth and depth.

>meera.siva@thehindu.co.in

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