Private investors competing for commercial realty in India

India’s services-led economy,  which is the fastest growing in the world, has created a steady market for income-generating commercial real estate, giving private investors a chance to list these assets through real estate investment trusts (REITs). These trusts are listed entities holding income-generating real estate assets from which earnings are distributed to shareholders.

To help real estate and infrastructure developers list their rent-yielding assets as well as provide large and small stock market investors with an inflation-indexed product, the Stock Exchange Board of India, Sebi also came out with REIT guidelines two years ago. In order To further enhance the optimism in the commercial real estate market, The Union government has also recently given tax clarity in setting up REITs, as sought by global investors.

Bulge-bracket investors like Blackstone, Qatar Investment Authority, Goldman Sachs and GIC of Singapore are some of the institutional investors who have been increasing the volume of their Indian office space portfolio in recent years.

Brookfield Asset Management, one of the world’s largest property and infrastructure investors, is just a few days away from owning the commercial real estate assets of Hiranandani Developers in Powai near Mumbai for approximately Rs 6,700 crore). In the transaction, the company will buy the 4.5 million-sq-ft business park, making it the single largest commercial property acquisition in the country.

This deal would outdo Qatar-backed RMZ Corp’s recent acquisition of Equinox Business Park from Essar for Rs 2,400 crore in Bandra-Kurla Complex as the largest MA in the country’s commercial real estate market. Brookfield’s acquisition of the AIM-listed Unitech Corporate Parks for over Rs 2,000 crore in 2014 was another big transaction. The Hiranandani deal would see Brookfield competing with Blackstone Group, the most aggressive buyer of Indian office properties until now, for a bigger share of the 400 million sqft grade-An office space in India.

After acquiring Unitech Corporate Parks and Gammon’s road and power assets, Brookfield pipped other potential suitors (Canadian Pension Plan Investment Board and Blackstone) with an aggressive offer to chase down its third Indian buyout deal with the Hiranandani transaction.

With Unitech Corporate Parks 11million sq ft of leased office space and a potential to develop 6 million sq ft more, The Hiranandani deal will take Brookfield’s portfolio to over 21 million sqft. Blackstone, through joint ventures and fully owned subsidiaries, already has a 50 million sqft portfolio of office space in the country.

Stamp Duty for property transfer

Following representations received by the prime minister’s office (PMO) from both domestic and foreign private equity players in the past two months, Finance Minister Arun Jaitley is expected to consider the issues of scrapping stamp duty on transfer of properties by private individuals and firms to real estate investment trusts (Reits) and making dividend distribution tax (DDT) ‘pass through’ for Reits and investors in the trusts. Tax levies, including DDT and stamp duty issues, were flagged by top investment bankers and chief executives of companies like JP Morgan & Blackstone.

The real estate industry, equity investors and international trusts have represented to the government for granting “pass through status” for dividend payments by Reits. In effect, rental income from assets with the trusts would not be liable for tax as and when these assets or units are returned to the investors.

The demand for exemption from payment stamp duty and DDT was put forward after the government recently scrapped long-term capital gains tax on transfer of Reits units by their sponsors or investors. An exemption on payment of minimum alternate tax (MAT) when investors transfer shares to the Reit or on sale of Reits units was also granted by the Government recently.

Pending tax issues have been dissuading equity investors and real estate companies from making it big in real estate investment trusts (Reits) and infrastructure investment trusts (InvITs), rating agency CARE said in a note. In his last budget, finance minister Jaitley had given hope to real estate companies looking to list their rent-yielding real estate assets through Reits. Reports from various analysts suggest that the potential for Reits listing in India was about $ 20 billion since in May, the Union cabinet allowed foreign investors to take exposure in Reits to bring in capital and reduce the debt liability of domestic real estate companies.

As per estimates made by real estate firm Raheja Group, the top seven cities of India have more than 400 million square feet of operational office space; of which, over 150 million sq feet would be ready for Reits listing by April.

The largest realty developer, DLF has announced plans to start two Reits, with one exclusively for commercial office space. The company plans to monetize about 30 million sq feet office and retail space by the end of this financial year.

“The government may not wait till presentation of Budget in February next year, instead, it may shortly notify the exemption on payment of stamp duty on transfer of properties to Reits,” confirmed a PMO official. “Exempting Reits completely from payment of DDT might need further discussion,” he added.

Union Budget 2015-16

It is the demand of real estate developers in upcoming Budget to revive the tax structures and lower interest rates for the home buyers as home is there ultimate need. Apart from to seek for better infrastructure status for housing, Getamber Anand, the Elected President of CREDAI stated in real estate press conference organized by RICS that “The government should provide some fiscal incentives to the real estate developers to build affordable housing.”  NAREDCO Chairman Naveen Raheja stated that: “There should be some real stimulus for the affordable home buyers in form of lower interest rates.” The more he added that we wish this budget will provide better infrastructure status to housing if not the entire real estate”. On the same occasion, CBRE South Asia Chairman and Managing Director Anshuman Magazine stated that infrastructure development and low cost funding should be key for the revival of the real estate sector.

CEO Embassy Office Parks, Michael Holland demanded that “Now it’s perfect time when central government should provide some clarification on tax treatment of Real Estate Investment Trusts (REITs), particularly on Dividend Distribution Tax (DDT) because we all know that real estate sales are down and it can put the realty market in worst post-global financial crisis. It means that we are at the bottom, it can only go up from here as sales are not happening so this is good opportunity for buyers to buy home”. Commenting on the need to incentivize the affordable housing segment, Sachin Sandhir RICS Global’s Managing Director – Emerging Business & MD – South Asia said: “Despite the inherent fundamentals of the realty market, things have slowed down in recent times and we must introspect as an industry the reasons why this has happened, and address the issues. The core issue of increasing affordability and supply of housing should be addressed.”

In September 2014, SEBI, which is market regulator, had notified that there are few norms for listing of new business trust structure under REITs and they would help to attract more funds in a transparent manner into the realty sector.These norms were notified when Finance Minister, had provided the REITs ‘pass through’ status for the purpose of taxation in the last year’s budget, Vineet Relia, MD of SARE Homes stated that in order to ‘Make housing for all a Reality’ central government should look into relaxation of taxes, and lower interest rates with easy process of financing for the developers and build adequate infrastructure”.