Mumbai, July 20: Finance minister Arun Jaitley is likely to have opened up a market worth at least Rs 70,000 crore by announcing tax breaks for real estate investment trusts (REIT) in the budget.
These instruments have a huge potential considering the fact that they can invest in at least 50 per cent of the office space available in the top six cities.
Jaitley had announced a tax pass-through status for REITs in the budget. It means income by way of interest received by the trusts will not be taxed in the hands of the trust.
These realty trusts are similar to mutual funds in that they raise money from investors and put them into real estate assets that may comprise rent yield from commercial properties such as office buildings and malls or housing complexes.
These assets are held in an entity (special purpose vehicle), which is under the control of the trust.
Investors in these trusts earn from both dividend (from the rent collected) and wealth accumulation (capital appreciation of the underlying property). The rent collected is subsequently paid to the investors as dividend.
The new instrument is expected to benefit the domestic real estate sector by providing a major source of funding. Industry experts such as Niranjan Hiranandani, managing director of Hiranandani Group, maintain that realty trusts are set to be a huge success and are likely to net $10 billion in this fiscal itself.
It is expected that pension funds, foreign institutional investors and other long-term investors will show huge interest in these instruments.
According to a note from Edelweiss Securities, India has Grade “A” office market of 375 million square feet in the top six cities. Of this, 80-100 million square feet could be up for REIT listing once it gets introduced. The brokerage said assuming an average rental of Rs 60-65 per square feet, 80-100 million square feet provides a rental potential of over Rs 6,000 crore.
“Assuming cap rates of 8-10 per cent, REIT has a potential market size of Rs 70,000-90,000 crore,’’ it added.
The cap rate, or capitalisation rate, is one of the parameter that helps to assess a real estate investment. It is the potential rate of return on the property. Therefore, a higher cap rate is beneficial for the investor.
Some of the entities owning rental assets include DLF, Unitech, Phoenix Mills, Indiabulls Real Estate, Prestige Estates and Oberoi Realty. They are expected to benefit from the introduction of REIT in the domestic market.