THE GIST of Editorial for UPSC Exams : 22 MARCH 2019 (The REIT choice ties (The Hindu))

The REIT choice ties (The Hindu)

Mains Paper 3: Economy
Prelims level: REIT
Mains level: REIT impacts on financial Market

Context

•  Indian investors are partial to real estate and vastly prefer fixed income instruments over market-linked ones.
•  Real Estate Investment Trusts (REITs), which combine regular rental income with capital appreciation from property prices, have had a difficult time getting off the ground.
•  It has taken five sets of amendments to SEBI’s original REIT Regulations of 2014 and multiple tax tweaks, before India’s first REIT from Embassy Office Parks could flag off its initial public offer this week.
•  The institutional investors have lapped up the offer, individual investors have been hesitant in their response.
•  The tentative response reflects the lack of investor awareness about the vehicle and the peculiar challenges that the Indian market poses to the REIT structure.

REIT listings requirements

•  With 33 million sq ft of prime office assets under its belt, 95 per cent occupancy and rental income flowing mainly from multinational and IT firms, Embassy Office Parks is a good candidate to flag off REIT listings in India.
•  The offer also comes at a time when demand for commercial space has been outpacing supply, resulting in soaring commercial rental yields.
•  SEBI has set a high governance bar on Indian REITs by requiring sponsor skin-in-the-game, independent valuation of assets, mandating 90 per cent distribution of surpluses and empowering unit-holders to change management, approve asset disposals and borrowings.
•  But Indian REITs face multiple operational challenges relative to their developed market counterparts.
•  The fragmented property market and complicated land acquisition rules make it necessary for REITs to take on leverage and adopt a multi-layered holding structure.
•  The grey component in property deals and the illiquid nature of the market render NAV calculations tricky.
•  Taxation of REIT returns for investors is a complicated affair too, with different tax rates applicable on dividend, rental and interest income.
•  But most important, with risk-free government schemes offering guaranteed returns as high as 8 per cent, Indian REITs need to manage very high yields as well as capital appreciation to attract domestic investors.
•  For the Embassy IPO, being the first REIT offer, lack of investor familiarity with the vehicle has also been a challenge, with confusion over the offer structure, gross versus net yield, applicable costs and taxation aspects.

Way forward

•  REITs have an important role to play in the formalisation of the Indian real estate sector. REIT IPOs also offer a good route for the beleaguered real estate developers to deleverage.
•  Therefore, before more such offers can tap the markets, SEBI must kick off an investor education initiative to create greater awareness about REITs.
•  A rejig of standard IPO offer documents/disclosures to reflect their unique characteristics is also in order.
•  Advisors, who have struggled to evaluate this product, need to equip themselves.
•  The post-listing performance of the Embassy Office REIT is likely to be closely watched by other property market participants.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q1. Global Risk Financing Facility is related to:

A. World Bank
B. IMF
C. WEF
D. WTO

Answer: A
Mains Questions:
Q1. Discuss the establishment of REITs and challenges in financial market.