Will Budget 2018 Give Reits Wings?
Despite the Securities and Exchange Board of India (Sebi) notifying the norms on Real Estate Investment Trusts (Reits) in 2014, there is not a single entity that has been launched in India so far. This exemplifies the dire need to review the bottlenecks which have strangulated this investment channel which has a potential to transform the real estate investment scenario in the country.
In the past quarters, the government has done a commendable job of addressing the issues related to the dividend distribution tax (DDT) and the long-term capital gains tax on the transfer of units. However, the matter related to exemption in stamp duty at the state level is something that needs to be revisited in the coming Budget Session.
Globally, Reits are looked upon as one of the most prudent ways for retail investors to put money in the real estate market. Reits allocate units of real estate just like mutual funds, and one can buy and sell these units in well-organised markets. Owing to the fact that Reits rule out the general risks related to real estate investing for the retail investors, they are received quite well in the markets, and the same was expected in India, too.
However, the response so far from the industry side reveals that there is a need to incentivise this stream, at least in the initial few years. It is just like the special economic zones (SEZs) which were provided tax sops of sorts in order to gain traction. The same goes with Reits as well.
It is going to be a new product in the India market and this is why the organisations that may be interested in launching Reits in the market would naturally tend to test the waters first. It will involve a huge amount of capital and considering the fact that REITs are expected to invest only in income-generating properties, the returns vis-à-vis the amount of investment required to buy up-and-running properties would be in the conservative range of 3-7 per cent per annum.
The government will have a key role of enabling both Reits as well as the investors to evolve this investment platform which can contribute significantly to the economy. So, investment in Reits should get entitled for tax deduction of at least Rs 50,000 a year, and the rental returns generated from them should be tax-free up to some extent. Else, including the returns of 3-7 per cent a year in the taxable income would result in income tax of 10-30 per cent, and investing in Reits won't appear to be a sound proposition for investors.
In India, and globally, real estate always remains one of the most-preferred asset classes for people. But, due to the capital intensive nature of real estate investing, millions of people are not able to enter this market despite all the intentions. Reits, which are slated to offer each unit starting from Rs 2 lakh, can help attract this untapped pool of investors, injecting large amount of investment capital in the economy. Hope the Budget 2018 would introduce the necessary measures to make Reits a more viable investment platform for retail investors in India.