Sebi revives process of introducing Realty Investment Trust

Market regulator Securities and Exchange Board of India (SEBI) has revived the process of introducing real estate investment trust (REITs). Sebi was looking at this alternative investment option back in 2006 but have shoved the process post the Lehman fiasco. Sebi has now started meeting with developers and a working paper is very much in the works.

REIT effectively provides an alternate investment vehicle to a private investor. So rather than investing directly into properties, one can buy unit in REIT and then REIT in turn could be listed on stock exchange, so that the liquidity force investor to come in and out of a REIT easily. One can buy or sell a REIT and then at the backend what the managers of REIT do is they invest the money raised into real estate. So one can have retail oriented REITs which is just invest in retail properties, one can have residential oriented REIT, yield based REITs and REITs which are focusing on just capital appreciation. So, REIT effectively gives an alternate investment vehicle in real estate which is lot more liquid. One can trade it on stock exchange and get out of it or buy in as per his wish In layman terms imagine REITs to work a bit like mutual funds. Macquarie believes that unprecedented weakness in the rupee and the government’s attempt to attract foreign capital are the main reasons for Sebi to once again consider REITs. It could also provide a new lease of life to the cash trapped commercial real estate sector. RBI in fact has a 100 percent risk weightage to commercial real estate and that certainly has played a big role in restricting capital. Macquarie goes on to say DLF, Prestige Estates and Phoenix mills would be the biggest beneficiaries if REITs were indeed to become a reality. So Prime Property touched base with DLF to get a better understanding of REITs and also do a check on commercial real estate. This sector has been in the doldrums with vacancies across India being as high as 25 percent. Ramesh Sanka, DLF’s head talked about rental business for commercial and retail real estate. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Have you or anyone at DLF had discussions with Sebi as far as REITs go? A: We have not directly met the market regulator, but definitely we know that whether it is Asia Pacific Real Estate Association (APREA), whether it is many other people, whether it is the big fund investors. They are all already in dialogue with both government at the finance ministry level, at the Sebi level. Both Finance Ministry and Sebi are showing positive interest because they find that this is the only way two things can happen. One is a small investor who is there in the market can participate into a real estate game. Second is that this is the only way that the foreign investors or the FDI can be revived into this sector. Q: But this is the second time the market regulator is looking at REITs, what are the big concerns from the first round of discussions that were there back in 2006-07, what would your recommendations be for the final guidelines? A: If we were to compare slightly from the Singapore rate model, the income tax is not there in the properties but here we will be subjected to an income tax whether it is IT SEZ or whether it is other commercial property. Second important thing that we have to understand is that after the income tax the second one when you start distributing the extra money that you have that is where the dividend distribution tax comes into place. So, REIT is one model which assumes that you will not be taxing this dividend distribution either in the company’s hands or in the recipient hands. I think that is where the real focus the government needs to do and that is where everybody is requesting the government to find out a mechanism where both these can be exempted. Q: Whether the government is in any mood to offer tax breaks or not is very much debatable but if there is status quo what will be the effective rate of taxation and would REITs then still be viable? A: Today, if there is Rs 100 income probably in the rental, almost it is at around Rs 26 will go towards the income tax and the balance Rs 74 you will have to subject it to the dividend distribution tax. That will be depending upon how much you are distributing. In a rate approximately out of 75 you may have to distribute around Rs 68-70. And if that is subjected to around 17-18 percent our dividend distribution tax then the amount that is left over is quite small. Only around Rs 60 will go up to the hands of the REIT investors. So, there is a need to increase this so that the yields are proper and the investments will flow into REIT market. _PAGEBREAK_ Q: Is a REIT something that excites DLF? Would you look at it? Before the Lehman crisis you were considering a REIT listing, though that was in Singapore, not in India. A: I do not think that we are looking at a REIT investment. We will go forward and see what the best mechanism is. Today we believe that there is no need for us to do more and more capital market transactions or more investment transactions. Q: Are there any signs at all of a revival in commercial real estate? A: The commercial market needs to be divided into two segments, one is a Special Economic Zone (SEZ) market and another one is a non-SEZ market. First I will talk about the IT SEZ market where there were volumes available, but unfortunately some of the deals are getting postponed. So, there are not big volumes the way it used to be few years back. More important is the new taxations that have been imposed on SEZ also has taken sheen out of the SEZ and volumes also have suffered. We realised this and we tried to pass on some of the benefits and tried to increase the volumes in this market by reducing and slashing the rates in Gurgaon. Q: How much have you slashed rentals by? A: Today we have reduced our average rentals to around Rs 55 in case of an SEZ in cyber city and in case of our SEZ on the NH-8 we tried to reduce it to around Rs 45. So, these are steep reductions that we have given over a period of last one and half year almost by around Rs 10 which is around 15-20 percent. Q: Has the reduction in rentals paid off? Have you been able to sign on more tenants? A: We have done recently and we are finding that the interest levels are very high. We are quite sure of closing some of the deals, but need not necessarily that all these deals are new volumes. Some of them are also consolidation volumes. Some of them are moving from other SEZ locations. So, it is a mix of both and we are quite confident as we will be able to lease out some volumes. Q: You have reduced rentals for IT SEZ in Gurgaon. What about other cities? Are you following the same practice? A: In other cities in Hyderabad, Kolkata and Chennai we have very little volume leftover. So, we are not trying to be any price aggressive there. Q: With no revival in sight for commercial real estate is DLF putting its plans on hold? A: I will answer saying that in the last 2-3 years we have not started any new projects for construction either into IT SEZ or into the other non-IT SEZ office markets. Whatever was under construction those all we have completed. So, we are trying to lease out those additional areas that are all available with us. Q: Given all of this how much is DLF still expecting to earn from commercial leasing this fiscal? A: Current year we expect to end this DLF Rentco or what we call as the entire rental business to approximately around Rs 2,000 crore plus. _PAGEBREAK_ Q: We all know that commercial real estate is a great indicator of the economy. Tell us what is going on. Considering companies are in downsizing mode are vacancies going up even further? A: Two things have happened in last couple of years. One is that whenever a tenant was occupying buildings, now he has started consolidating. So obviously whenever a tenant starts consolidating, in all the four places let us say he has 100,000 in each place. When he consolidates obviously he will get some economies of scale. So, always the consolidations will reduce the requirement of the area by almost like 10-15 percent. The second one is that yes, there are downsizings that have happened in many of the smaller setups. They also have reduced the sizes and I think it is better, because they will become leaner and they will also become fitter. However, to that extent it puts a lot of effort on our part to increase more and more number of tenants and get the areas filled. An interesting point is the ticket size. What used to be in the past to now what the ticket size is; there is a drastic reduction. Almost like 2006-2007 the ticket sizes will be average of around 50,000 square feet plus. Now the average of all the ticket sizes will be around 15,000-20,000 square feet. So, that will also talk of not only the volumes getting reduced, but widespread and increased diversity in terms of the tenant base. Q: With commercial real estate still very much in the doldrums would you say that perhaps now is a good entry point for High Networth Individuals (HNI) to invest? We keep hearing about all these rock-bottom prices? A: It is a debatable point. Anyhow it is a cap rate mechanism. If your rent is X then it will be 10X or it is X plus delta X then it is 10 times X plus delta X. So, I do not think that in yield terms it is going to make much difference. Ticket size-wise this might be a right time to invest, because the lesser ticket sizes will be there now. Q: DLF is building the countries largest mall, the Mall of India, that is in Noida. I understand it is going to be ready by Diwali – tell us a bit about this project? A: This mall once completed is approximately going to be 2 million sq ft in small two phases. The first phase will be around 1.8 million sq ft. We are coming to the fag end of this mall completion. It is going to be a complete feast to the eyes of the public. It will have all the brands that one is looking for under one roof. All the big brands whichever is entering this country they all are going to put up their flagship stores in this mall. What is interesting is that inspite of the fact that there are approximately around 500 shops the way it has been designed, every shop is focusing and facing into the atrium. So, that is really going to help all the shoppers as there are no dead ends. People need not have to walk back going front and back so this is going to be a unique design that people will be seeing it. Q: I am going to ask this on behalf of all the shopaholics which are these big brands? A: I think because of the confidentiality reasons we cannot give but you can be assured that top world’s number one to number six whatever you pick up the names they are all there. As anchors there is a big anchor even for retails, hyper market and games and sports, entertainment is going to occupy almost like 400,000 sq ft. Q: Unitech which you may still call as rival is also opening a very big mall bang opposite this Mall of India in Noida which you say is going to be India’s largest mall Have you seen a price war? Have you had no choice but to offer very competitive ventures to make sure they brand sign out with you and not with Unitech? A: No. As I said, all the big ones we work on the revenue share models. So, obviously more the revenue the more is the earning for us. There is nothing like fixed figure. Yes, there is a minimum guarantee that is there built everywhere. These minimum guarantees are only just for minimum purpose and on that basis one cannot make and run the mall. The minimum guarantees are always driven nearer to market rates. Q: DLF had initially planned the countries largest mall not in Noida but in Gurgaon, That Gurgaon project had been put on the backburner a few years ago – any chances of it being revived? A: First we want to complete the Noida mall and then start looking at the Gurgaon mall. Maybe Gurgaon mall is going to be bigger than the Noida mall. We want to pick up the learning points and do not want to start two big malls at the same time. Hopefully, the same teams once they execute the Noida mall, they should be able to come and help us in executing the Gugaon mall.