The Union Budget should offer tax incentives, including simplified structure, and sops for the development of green buildings to popularise real estate investment trusts (REITs) as an asset class among investors, industry insiders and experts have said.
India has four listed REITs, three of them predominantly own office assets, and have been backed by a clutch of key overseas and Indian investors such as Blackstone and Brookfield.
“Introducing tax benefits for REITs, particularly the exemption of double taxation on dividend income, would be a highly welcome move,” said the managing director of research and consulting at Savills India.
The step would not only enhance liquidity but also drive participation from both retail and institutional investors, making REITs a more attractive asset class, he said. Such reforms could also pave the way for increased foreign investments, fostering greater market dynamism.
Despite interest from investors and the Securities and Exchange Board of India (SEBI) promoting REITs as a safe avenue for investing, retail investors are yet to warm up to them, as returns have been sluggish.
With challenges in the office market, especially with relatively high vacancies and a low uptick in rentals, most investors are waiting for the segment to mature.
The share price of India’s first listed REIT, Embassy Office Parks REIT, has gained around 18 percent since it listed on the National Stock Exchange in April 2019, far lower than the rise in the benchmark Nifty 50 over the same period.
Institutional investors, however, said REITs also remain an attractive option due to the regularly distributed cash flows from the investment managers of these REITs, as well as the hybrid debt-and-equity structure as an asset class.
More than Rs 18,000 crore has been distributed by REITs since their inception, a report from the Indian REITs Association (IRA) said.
As the attractiveness of REITs improves as an asset class, tax exemptions on capital gains and dividends would ensure more investor participation, experts said.
“With SEBI introducing regulations for small and medium REITs, one would expect more traction in this space. It would therefore be relevant to enhance investor confidence by introducing capital gains exemptions for direct asset transfers and security swaps, aligning withholding tax rates for FPIs, and granting dividend tax exemptions to unitholders,” an industry expert said.
Regulations should also be eased to allow charitable and religious institutions to invest in REITs, to boost liquidity and extend the concessional 12.5 percent rate on long-term capital gains to listed securities held by REITs, he said.
Experts said that measures to incentivise the development of “green buildings” will also help the cause of REITs, with companies seeking to lease space only in energy-efficient and sustainably-built office spaces to meet environment, social, and governance (ESG) requirements.
Another industry expert, said 67 percent of the REIT-worthy office stock in India is “green-certified”, showcasing the emphasis on sustainability by large developers.
