The Finance Minister has attempted to channel funds into the infrastructure and realty sectors by easing the tax treatment of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (Invits). While the potential for fund-raising through this route is huge, there are many issues still to be addressed. REITs typically invest in completed real estate commercial projects and pass on the rental income from them to investors. With a small outlay, these trusts make it possible for investors to own a share in commercial property and also enjoy the high rental income it offers. Real estate developers also stand to benefit as they can sell completed projects to REITs and deploy this money in new projects. Invits gives investors a similar opportunity in infrastructure projects. According to industry estimates, funds worth ₹63,000 crore can be raised by real estate companies by selling completed projects to REITs. The Economic Survey states that 239 projects are stalled as of this February, leading to a cost over-run of ₹898 lakh crore; these could be re-started through Invits.

Despite the obvious benefits of these instruments, companies have been hesitant to launch REITs and Invits due to various reasons. One of the concerns was that the sponsoring company had to pay tax on the rental or other income earned by them. Worse, there was double taxation as income paid to investors was also taxable. The Budget has proposed to remove this anomaly by making the income tax-free for the sponsor, thus giving a tax pass-through status to these instruments. This will increase the pay-out to investors and also reduce the tax burden on the sponsor. While this will help, other obstacles remain. SEBI proposes to allow REITs to list on stock exchanges so that investors can buy and sell these instruments easily. But the valuation of real estate or infrastructure projects could prove a challenge, despite the regulator proposing valuers to provide periodic reports. The wide variation in the value of property between various localities within a city and the daily change in property prices will make valuing the underlying asset quite difficult. Similar fluctuation in rental income will also pose a challenge.

These instruments are also highly risky as the income earned is prone to wide fluctuations. The risk will be even higher in the case of investments in partially completed infrastructure projects that are vulnerable to regulatory risk. Given these challenges, it may be a while before REITs and Invits become part of the investor portfolio. But when they do, it will considerably ease the liquidity constraints of the realty and infrastructure companies.

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