The recent proposal of the government of India and SEBI to make Real Estate Investment Trusts (I-REITs) viable in India has been dubbed as a game changer for the Indian real estate market. The final draft of the I-REIT regulations has relaxed a few of the original draft conditions, particularly reduction in REIT value to Rs 5 billion from Rs 10 billn, reduction in investment in completed rental assets to 80% and allowing multiple sponsors.
Commenting on the Real Estate events, HDFC securities, said, ''However, we believe that inspite of these positive developments, I-REITs still have to tackle multiple hurdles before they become a reality in India. The major hurdles include 1) Proposed tax pass-through status for I-REITs still imposes corporate tax at SPV level and Dividend Distribution Tax (DDT) when a SPV pays dividend to a REIT, Capital gains tax on sale of REIT units being deferred and not exempt, Negative interest spread for I-REITs, Emergence of alternate funding options such as Commercial Mortgage Backed Securities (CMBS) at post tax cost of 7% for developers, Depressed office rentals across India that have remained stagnant over the last five years and High stamp duties for purchase and sale of assets in India at 5-14% that need to be rationalised.'
''We await final clarity on tax regulations and are of the view that I-REITs will hit the market only when rentals begin to appreciate. However, we believe that rental uptick will be micro-market and asset specific, as the prevailing trend of supply outpacing demand is expected to continue over CY14-16E,'' it added.
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