Sebi has eased some rules, but cumbersome legal process and time taken to aggregate assets stand in the way
Eight years, four consultation papers and countless relaxations in norms later, the introduction of real estate investment trusts (REITs) in India is still at least a year away.
While the capital markets regulator has eased rules for asset valuation and related-party deals, onerous legal and listing processes, and the time taken to aggregate assets stand in the way.
Restructuring and consolidation of commercial office portfolios by developers at DLF Ltd, one of the first companies that expressed an interest in introducing a REIT, will also likely add to the delay.
On 18 July, the Securities and Exchange Board of India (Sebi) unveiled proposals aimed at making REITs more attractive. This included allowing them to invest in holding companies which have a multi-layered structure of real estate asset ownership, expanding the definition of real estate to include hotels and hospitals, allowing REITs to invest more money in under-construction projects and increasing the number of sponsors to five from three.
While welcoming the move, real estate industry executives also said that it will take time for companies to access funds by listing REITs.
Companies such as Blackstone Group LP, Embassy Group, Panchshil Realty, RMZ Corp. and K Raheja Corp. have all drawn up plans to introduce REITs, but no one expects to list before 2017.
“It will take another 18 months for us to do a listing. An intensive process precedes a REIT which includes consolidation, meeting investors and a number of financial and legal matters,” said Jitu Virwani, chairman, Embassy Group.
The property developer, along with global investor Blackstone Group LP, is planning a $3-billion REIT involving a portfolio of at least 37 million sq. ft. This will include their jointly owned assets as well as some of Blackstone’s own assets, Virwani said.
Blackstone’s other partner, Pune-based Panchshil Realty, which has a 12 million sq. ft of completed, rent-generating office portfolio and an additional 6 million under construction, is also looking at a REIT with Blackstone “sometime next year”, said its chairman Atul Chordia, adding that the process is on.
However, it remains unclear if Blackstone will do a single REIT listing with its partners in India, or separate ones with respective partners.
Blackstone is the largest commercial office space owner in the country, with 50 million sq. ft spanning 16 assets in five cities.
Blackstone didn’t respond to an email query.
Similarly, Bengaluru-based RMZ Corp., backed by the Qatar Investment Authority, plans to launch a REIT, but is unlikely to do so before 2018, said co-owner and corporate chairman Raj Menda.
The firm is still actively looking for acquisitions and is in the process of buying out office assets in different parts of the country. For practical reasons, only once it has a significantly sized portfolio, will it actually do a listing.
Just like RMZ, Tata Realty Infrastructure Ltd (TRIL) and its investor partner Standard Chartered Private Equity, through their partnership, will eventually do a REIT; but right now, the focus is on buying new land parcels and developing them. They may also buy out office assets.
“The quality of the offering and the macroeconomic factors are critical and has to be attractive for retail investors. Few developers have the desired volume of assets and they need to aggregate a bit more. With more volume, risks of vacancy get diluted and will generate better yield. Also, interest rates need to fall further to ensure better returns for investors,” said Abhishek Goenka, partner, direct tax and real estate expert, PricewaterhouseCoopers India.
Despite the delays, REITs remain a doable and convincing option for developers and investors to monetize their commercial assets, aided by the fact that the commercial office sector has been the only bright spot in a lacklustre real estate sector in the past three years.
Rental rates have been consistent, take-up of space has been healthy, accompanied by tremendous interest from investors in buying good-quality office properties. According to an estimate by property advisory Cushman and Wakefield India, the assets that may qualify to be included in REITs may reach $20 billion by 2020. In the first three to five years, as much as $12 billion could be raised.
The country’s largest realty developer by market value, DLF, too is drawing plans to launch its first domestic REIT to extract maximum value from its large office portfolio, according to a person close to the firm. However, it is in the process of selling a 40% stake in its commercial property arm, DLF CyberCity Developers Ltd, owned by the promoters to institutional investors. “Once the stake sale is done, or alongside, the company will also do a share sale and once the promoters infuse the money generated from the stake sale back into DLF, the company, along with its investment partner will look at launching a REIT,” the person added.
DLF said earlier this year that it is preparing for REITs worth Rs.6,000 crore in the next two years. The realty firm plans to list its commercial office assets and eventually, also its retail shopping mall portfolio. It has been ramping up the latter by structuring ownership of existing assets in order to facilitate potential monetization either through REITs or otherwise in the future.
Another large commercial office space owner, Mumbai-based K Raheja Corp. is also working towards a REIT but alongside, it is now focusing on selling a stake in its rental portfolio to raise capital.
If these REITs are indeed introduced in 2017, it will be almost a decade since the markets regulator first introduced the concept of this new investment vehicle.
While Sebi has been continually attempting to ease the norms (see timeline), issues related to holding structure, tax problems and disclosure norms made companies unenthusiastic of floating this product.
It was only after the government stepped in and exempted REITs from dividend distribution tax and minimum alternate tax on capital gains made through transactions of REIT units, that realty firms, anticipating regulatory relaxations, started drafting REIT launch plans.
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