A cursory look at India’s infrastructure in comparison with other Asian nations like Singapore, Malaysia and Hong Kong tells us that India’s infrastructure requires huge investment. According to the latest estimates, India requires nearly $1 trillion over the next five years to bring Indian infrastructure to Asian levels over the next 5 years. However, that is easier said than done. To invite such huge investments into infrastructure and housing you need to have good financial structures and investment options that bring about a better sync between infrastructure projects and financers. It is here that Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) come in handy.

A REIT is an investment vehicle that owns and operates infrastructure and housing assets. Let us understand this in greater detail. A REIT may take a stake in 5-6 different infrastructure projects like toll roads, housing projects, malls etc. The REIT gets a share of the yield on these projects like toll fees, rents, royalties etc. These assets are converted into marketable securities and then sold to investors. This process is also called securitization. An investor who commits money to such REITS can get returns from a portfolio of assets like housing, malls, toll roads, bridges etc. This is like hitting two birds with one stone. On the one hand, it makes institutional funds available to infrastructure projects. On the other hand, investors get a new avenue of investment that can pay returns above the risk-free rate of interest.

Let us first look at how these REITs will benefit the developers

A developer of a real estate projects gets an easy entry and exit opportunity into real estate projects. Today in case of a housing project, a developer only gets an exit opportunity once the project is fully sold out. With REITS, the developers can pre-sell a stake in the property to the REIT and also attach a lien on the future cash flows on the project. This will come as a great relief for developers who are under constant cash crunch. More importantly, REITS will help developers to transform their business model from an asset-heavy model to an asset-light model in the process improving their ROI. Above all, there are billions of dollars stuck in incomplete and stalled projects. This money can be released through REITS.

Can the REITs and InvITs really benefit the investor community in a big way?

As mentioned, the REIT packages real estate assets and converts them into investable securities. These REIT securities are typically sold to institutional investors like pension funds, insurance companies, endowments etc. The advantage here is that real estate / infrastructure projects are typically long-range projects and this will perfectly gel with the tenure structure of long term investing institutions. They can also earn above-market returns with minimal risk as these securities are asset-backed and cash-flow backed. In other countries, REIT securities are also made available to retail investors and it offers them an additional avenue for investing.

Will there be larger macro benefits from the REITS / INVITs story?

From a macroeconomic standpoint, there are some distinct advantages that REITS will proffer. Firstly, it creates a market for a new asset class that was hitherto not available to retail and institutional investors. In the process it will also expand the equity and debt markets in India. Secondly, it will bring about greater transparency in the real estate sector which is currently saddled with problems of opacity and infringement of buyer rights. Thirdly, REITS will also help the government finance its ambitious projects in infrastructure and housing and offer an organized market mechanism to raise funds for such projects. REITS could, in fact, be a big boost to the Smart Cities project that is currently under execution in India.

Are there any major challenges to the REITS / INVITs concept in India?

REITS are nearly an $800 billion industry in the US (Source: PWC). In countries like UK, Singapore, Malaysia and Japan this industry is quite large. For the Indian REITS market to pick up, there are some basic requirements that need to be addressed on an urgent basis. Here are a few of them…

· The government should permit up to 100% FDI in REITS through the automatic route. This will help REITS get large scale funding through foreign partners.

· There should be clarity on exemption from double taxation of dividend. Since this is a process of securitization, there will be a payment from the SPV to the REIT and subsequently a payment from the REIT to its investors. The payment of dividend from SPV to REIT must be made explicitly tax free as dividends will anyway be taxed in the hands of the final investors. This is, after all, a pass-through-certificate and hence taxing it at two levels only complicates the structure.

· The government must also clarify on the levy of capital gains tax at the time of transfer of assets from sponsor to REIT. Again, being pass-through-structures, they must be made exempt from gains at the first level.

· The government has been issuing guidelines and clarifications time and again on REITS, but the critical issue of double taxation needs to be address along with the FDI via automatic route. If these 2 issues are addressed, these REITS can go a long way in changing the face of the real estate and infrastructure in India.