REITs body seeks equities tag for Real Estate Investment Trusts, in talks with SEBI

REITs are currently less than 10 percent of the total market capitalization of the Indian real estate

The Indian Association of REITs, is in talks with the Securities and Exchange Board of India, making a case that Real Estate Investment Trusts (REITs) be classified as equities, said Arvind Maiya, CEO of Embassy REIT.

Just like mutual funds allow investors to own a fraction of the company; REITs or real estate investment trusts allow investors to own a fraction of the real estate without purchasing or managing the property. REIT is a company that owns or finances income-producing real estate properties where they pool money from the investors and invest it in real estate projects like workspaces, malls, and others.

If REITs are classified as equities, it would allow for index inclusion wherein a lot of passive flows would come into REITs, said Maiya in the Indian Association of REITs event in Mumbai on March 12. He further said that equities as a product increases the liquidity, which could lead to more trading.

"If REITs are classified as equities they could be included in ETFs, or equity mutual funds, which will lead to more liquidity and REITs could get a wider acceptance," said Alok Agarwal, MD and CEO of Brookfield India Real Estate Trust. He also said that while Indian indices have not included REITs, globally SP Global and FTSE have already included Indian REITs in their component.

What’s in for investors?

Agarwal also said that if REITs get classified as equities, the regulations could be in line with equities for capital gain tax, which could be a positive factor for investors.

In equities if the holding period is less than 365 days, indicating a short-term investment, a tax rate of 15 percent is applied. If the holding period exceeds 365 days, which is a long-term investment, the profit from the sale of equity shares exceeds Rs 1 lakh, a tax rate of 10 percent is levied on profit. While in REITs, on sale of listed units where units are held for less than 36 months, a short-term capital gain tax (STCG) at 15 percent is levied.

“Basically if you hold an equity for 2 years and then sell it you’ll have to pay a long-term capital tax (LTCG) of 10 percent. But if you hold a REIT for 2 years and then sell it, you’ll have to pay STCG of 15 percent,” said CA Suchek Anchaliya, a Direct Taxation Litigation Expert.

Also, REITS to be classified as equities is not easy. “It is difficult to classify REITs because they have multiple forms of income. Earnings in equities include dividends and capital gains and earnings in debt include interest and capital gains. But in REITs, there are multiple forms of income like dividend, interest, rent, and capital gain,” said Anchaliya.

Growth of REITs

SEBI chairperson Madhabi Puri Buch in an NSE event recently said that the market for REITs, InvITs, and municipal bonds could grow as big as India’s GDP in the coming years. She also said that investors should be made aware of the safety and presence of such asset classes.

REITs are currently less than 10 percent of the total market capitalization of Indian real estate, and hence there is a huge scope for REITs to grow further, said Sundareswaran, MD of Morgan Stanley.

India currently has only four listed REITs, three catering to office space and one catering to retail space. “REITs can move to various sectors like hotels, data centres, residential, multi-assets, and others in future and the sector can grow,” said Agarwal.

Talking about retail REITs, Dilip Sehgal, CEO of Nexus Select Trust said that almost 60 percent of India’s GDP is about consumption. “One billion young Indians, 1 billion middle-income, and 0.5 billion Indian in upper-income which is driving demand for malls in India which augurs well for retail REITs,” said Sehgal.

There is a gap of 6-7 million square feet between demand and supply, said Seghal. He further said that India has only 100 Grade A assets across the country, which is a very low number.

"When we compare this to a small country like Singapore, it also has 100 Grade A spaces. International and Indian brands are more than eager to open stores in India," added Seghal.

The Indian REITs Association is a non-profit trade organization formed under the guidance of SEBI and the Ministry of Finance, and is committed to advancing the growth and development of the REITs in India.