The REIT Way to Financial Maturity
As the Indian economy matures, new financial instruments will see the light of the day, which will help unblock the value of different asset classes, bring in more liquidity in the system, and offer new avenues for investment to the population, in general, obsessed with gold. The real estate is an important investment avenue in the Indian context, however the ticket size of the investment often restricts this option to a small number of investors. REITs (Real Estate Investment Trusts could be an answer, wherein a large number of people could invest in relatively small denominations.
The introduction of the tax pass-through status for REITs was one of the highlights of the Union Budget 2014. Like any new financial instrument, REITs will go through its own learning curve with many issues to be ironed out and other related aspects to be fine-tuned to make it more attractive for different stakeholders.
REITs are listed trusts that draw funds from investors known as unit holders.It invests these funds directly or through a special purpose vehicle (SPV) into revenue yielding commercial properties like shopping centres, office complexes, etc. Income generated from these assets is distributed to its unit holders.
The minimum asset size for a REIT is Rs 500 crore. The guidlines also require mandatory initial offer within three years from registration, with minimum offer size of Rs 250 crore. For investors, the minimum investment has been kept at Rs 2 lakh to ensure that investors only above a certain threshold of risk appetite should invest in this product. Subsequently, in the secondary market, the unit size of the investment could be Rs 1 lakh only.
On the tax front, the Finance Act 2014 had accorded the much-needed tax pass-through status to REITs. The underlying theme is that the trust will not pay tax on income.