The tax sops proposed in the Budget for REITs (real estate investment trusts) can help realise a potential $96 billion by listing the occupied commercial real estate across offices, retail and warehousing segments over the next few years, according to analysts and industry leaders.
According to a report prepared by KPMG, Knight Frank and Hariani & Co, nearly $96 billion worth or 1.41 billion sq.ft of occupied commercial real estate across the country, with the top seven metros forming a major part of it, can be listed on the REITs platform.
However, the major hurdle in tapping the potential is certain regulations and tax-related issues which the government needs to tackle to make REIT successful, KPMG India partner Punit Shah said in a note.
"The REITs could have a large opportunity in the real estate market with a growing economy, existing portfolio of commercial real estate and conducive investment climate. However, to get REITs to be functional and successful, the regulators have to ensure that the REITs regime is continuously reviewed in accordance with the changing market requirements," he said.
According to the report, the critical issues that need to be addressed include tax efficiency, one-time waiver of stamp duty on transfer of assets to REITs by states, tweaking of the Irda investment regulations to allow insurers to invest in REITs, thereby widening the investor base.
"Given the functional model of some of the REITs established markets, it is evident that its success depends on the capability to customise the rules and regulations governing it in a way that they fit into their own markets. The support of governing authorities to ensure a less restrictive REITs regime and favourable tax transparency status can be a critical factor in the development of a vibrant REITs sector in a new market," said Knight Frank India chairman, Shishir Baijal.
While there is huge potential, how much and how soon it is harnessed will depend on the overall economic momentum and the acceptance of REITs as an investment vehicle, he said.
The Budget proposed to rationalise capital gains tax for the sponsors of newly created business structure REITs, provided the sponsor will be given the same treatment on offloading of units at the time of listing as would have been available to him if he had offloaded his shareholding of the special purpose vehicle at the stage of direct listing.
"Exchange of shares of SPV (special purpose vehicle) for units of REITs would happen at market value and could result in profit in the hands of the sponsor, which could entail tax liability in the hands of sponsor under the provisions of minimum alternate tax.
"Since exchange of shares for REIT units can merely set up REITs and is not per se a commercial transaction, the government may consider exempting the same from MAT," he said.
He further pointed out that in case the SPV is primarily funded by share capital, normal corporate taxes would be applicable at the SPV level and any distribution of profits by the SPV would entail distribution taxes. Exemption from distribution taxes should be provided to the SPV to the extent it distributes dividends to the REIT.
"REITs present an interesting opportunity to securitise the critical real estate sector and effectively make real estate a tradable commodity. While some more clarifications are still needed, we should see launches by mid-2016," said Hariani managing partner, Ameet Hariani.
In a report, leading financial services firm JM Financial Group said the gold deposit scheme and REITs can help monetise 1 per cent of GDP for productive investment.
"Savings in non-productive physical assets, primarily property and gold, is 17 per cent of GDP... a well-run gold monetisation and REITs scheme can recycle one per cent of GDP, which can revive the savings rate in the financial and help fund investments," it said in a report.
REITs have market size potential of $50 billion with a return profile of 13-14 per cent pre-tax, the report added.