When things are organised and institutionalised, all stakeholders benefit in such situations. The Real Estate sector in India has the potential to contribute much more to the Gross Domestic Product (GDP) in the coming years. As Mutual Funds (MF) are for shares and debentures, the Real Estate Investment Trusts (REITs) are for Real Estate assets.
REITs give investors an opportunity to have a stake in a trust that is statutorily mandated to make 80% of its investment in properties that are capable of generating revenues and 90% of its income must be distributed to the investors in the form of dividends.
Until the concept of REITs was introduced by the Securities and Exchange Board of India (SEBI), investors in India had to hold shares in listed real estate firms and many times these investments did not give good returns. REITs are professionally managed portfolio of rent generating real estate assets. It is a win-win situation for real estate developers and investors.
As per data available on the SEBI website, India currently has three listed office-backed REITs. Recently, Nexus Select Trust got listed as India’s first retail asset-backed REIT. The success of these listings have infused enthusiasm among real estate developers, and investors who like to own some sort of real estate asset in their investment portfolio.
Approximately 10% of office assets in India are under REITs and this means there is huge potential for more REIT offerings as the Indian real estate market matures. Established REIT players are interested in other real estate asset types that provide consistent rental yields, including industrial warehouses, shopping centres, serviced co-working, co-living, and hospitality. Investor interest in the warehouse and logistics industry has recently increased, and this interest would grow if these assets were listed as REITs. In May 2023, Blackstone-sponsored Nexus Select Trust issued its first retail REIT initial public offering (IPO), raising $400 million (INR 3200 crore). It was listed for more than the issue price.
REITs and Budget 2023
The 'debt repayment' distribution component from REITs and InvITs no longer has to be recognised as income from other sources, as indicated in the 2023 Budget. Such income is subject to capital gains tax until such debt repayment amount exceeds the issue price of the REIT in accordance with the Finance Act 2023.
Investors and businesses benefited from this modification because capital gains are only subject to a 10% tax rate if kept for a long time (36 months). This contrasts with the tax on "other income" that is based on individual tax slab rates, which, for individuals in the higher tax bracket, can reach as high as 42% (with surcharge and cess).
Following SEBI's amendment on July 30th, 2021, the minimum amount to invest in REIT India will range from INR 10,000 to INR 15,000. The minimum lot size for REITs was similarly reduced from 100 units to 1 unit under the same SEBI regulation.
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