Over 30 countries across the world now issue REITs.
India's first REIT to be launched by Embassy Office Parks, a joint venture of Blackstone and realty firm Embassy, is raising Rs 4,750 crore through the issue. The REIT issue will open on March 18 with a price band of Rs 299-300 per unit. The issue closes on March 20.
Over 30 countries now have REITs with US being the first country to introduce it in the 1960s. In Asia, Japan was the first country to introduce REIT, followed by various Asian counties like Singapore, Indonesia and South Korea.
Initially, growth in these countries was slow but it gradually picked up with changes in the REIT tax and regulatory regime, making it commercially viable and more acceptable to investors. Some learnings from international REITs that have not been included in the structure in India include concepts of stamp duty remission, overseas property portfolio, etc.
Globally, REITs have a proven and successful track record in several Asian countries such as Japan, Singapore, Malaysia, Thailand, Taiwan, South Korea, and Hong Kong. In 2017 alone, total acquisitions undertaken by REITs in APAC crossed $20 billion, with an approximate share of 15 percent in the overall commercial real estate acquisitions undertaken in the region.
In the first half of 2018, REIT acquisitions touched $10 billion, accounting for a share of 17 percent in the overall investment volume in the region during the period, said Anshuman Magazine, chairman & CEO, India, South East Asia, Middle East & Africa, CBRE.
For many real estate markets in the world and Asia, REITs have proven to be a game-changer for the sector and have the potential to boost investor sentiment. India offers major advantages such as a wide variety of quality assets, sustained government support in easing regulations, a wide investor base, and opportunities for capital appreciation, among others. Hence, we are hopeful that India's first REIT will be a big success and will help elevate global sentiments on the Indian real estate market, he said.US REIT
The US REIT market journey began in the 1960s. In the 1970s and 1980s, it was at a developing phase. It was in the 1990s, where the sector had achieved a substantial growth due to increase in acceptance of REIT among the investors as an alternative mode of investment in real estate properties. The reason behind such growth was majorly because of positive changes in the US tax and regulatory laws. The US REITs are classified on the basis of their investment form such as equity REITs, investing directly in properties and mortgage REITs, investing in housing loans and other real estate finance, which can be managed either internally or externally.
According to a report titled REIT-able Space In India A Closer Reality by Knight Frank and KPMG, the two important tax and regulatory breakthroughs for the US REITs have been the Tax Reform Act, 1986 and the REIT Modernisation Act effective from 2001. The TRA pushed for real estate investments to become more tax-transparent and for integration of REITs with ancillary real estate business, like property management, leasing or development, thereby facilitating more effective management of REITs. The RMA made way for creation of taxable REIT subsidiaries, which can independently engage in such ancillary business activities.
Australian REIT Market
The first Australian REIT was established in 1971. Australian REITs (erstwhile famous as the Listed Property Trust or ‘LPT’) are relatively simpler tax effective corporate structures enabling pooled property investment. Following the first Australian REIT, the market for listed Australian REITs developed progressively until the 1980s. However, the Australian REIT market received a boost from the lessons learned from the failure of the commercial property market in the early 1990s an essential lesson being the importance of holding some liquid assets along with holding direct properties.
REITs offered a convenient mechanism effectively blending investment in property along with a good liquidity position. This led to a huge roar in the Australian REIT market during the late 1990s, reinforced by both private players as well as institutions, around 60 REITs were listed on the ASX during this time. Further, increase in the popularity of stapled securities and internationalisation of Australian REITs further pushed the growth of the Australian REIT market.
Japanese REIT market
Japan is a leading REIT market in Asia. The first two J-REITs were listed in 2001 and thereafter the J-REIT market grew rapidly with around 41 J-REITs listed by early 2007.
This was due to reforms such as lowered tax rate on capital gains and dividends, allowing funds-of-funds to invest in REITs. Other factors such as large gap (“spread”) between dividend yields of J-REITs and interest yields of 10 year government bonds, track record of stable dividends among listed names greatly contributed in promoting J-REITs as a lucrative investment alternative.
Singaporean REIT market
The first Singapore REIT was established and listed in July 2002. The growth of S-REITs market after the launch of the first REIT was slow until 2005. However, post the declaration of the policy of remission of stamp duty in 2005, the S-REITs market experienced a major boost and the number of REITs more than doubled by 2006. The year 2009 was the first year, when the value of S-REITs assets were significantly written down owing to the impact of the great global financial crisis in 2008. However, S-REITs market gradually improved back to the normal conditions.
Most initial S-REITs are focused on domestic property portfolio, while the more recent S-REITs have expanded their property portfolio base to include overseas, primarily regional properties from China, Japan, Australia and India. Since 2010, Singapore REIT market has achieved huge success with increased focus on securitisation, overseas exposure in the S-REITs.
REITs in the UK
The UK REIT vehicle was launched with effect from 1 January 2007 by the Finance Act 2006. Within the first year of the regime itself, the number of registered REITs grew significantly, but since then the growth has been sluggish.
The UK REIT regime operates through a combination of legislation (primary and secondary) plus guidance. The primary legislation has been reworked as part of a project to simplify the U.K.’s tax legislation which forms part of the Corporation Tax Act 2010. The legislation now separates the property rental business from the other business activities termed as the residual business for taxation purposes.
Over the seven years from its launch, the UK REIT regime has evolved with a number of changes that have resulted in a more attractive REIT regime which are worthwhile to note. Key changes brought about in the regime were, relaxation of listing requirement to allow listing on secondary markets, abolition of flat 2 per cent tax charged on value of properties of groups entering the REIT market, allowing cash to be a good asset for the business test of 75:25 as also modification of stamp duty on bulk purchases of residential property, which were especially aimed at encouraging smaller real estate players seeking to start-up REITs and boosting the residential property markets.
Hong Kong REITs
H-REIT was introduced through the Hong Kong REIT Code in 2003. However, since its emergence, the H-REIT market growth has been sluggish. Its development story significantly lags behind the other REIT markets in the Asia-Pacific region mainly due to relative restrictiveness and want of some tangible incentives.
Recognising the need of the current REIT market, the Securities and Futures Commission (SFC) has revised Hong Kong’s Code on Real Estate Investment Trusts (REITs) on August 29, 2014, taking immediate effect. Under the new regime, Hong Kong’s REIT portfolios have been expanded to allow investment in retail properties, commercial and hotel properties, as well as properties in Mainland China.
Further permission has now been granted for REITs to invest in developing properties, also engage in development activities and to purchase financial instruments (including local and foreign property funds), subject to the criteria of minimum investment in rent-generating property, says the report titled REIT-able Space In India A Closer Reality by Knight Frank and KPMG.
Malaysia REITThe first Malaysian REIT was listed in 1989. It is regulated by the Securities Commission of Malaysia. There is no requirement concerning the number of investors and no restrictions on ownership by non-resident investors. Domestic corporate unit holders are taxed at 24 percent withholding tax, foreign corporate unit holders at the same rate and individuals and institutional investors at 10 per cent withholding tax. The market is growing although the pace is slow, says a report titled India’s Real estate and Infrastructure Trusts: The Way Forward by PwC.