Indian investors have got a new investment option in the form of Real Estate Investment Trusts (REITs).
The Embassy Office Parks had opened up its IPO to raise Rs. 4,570 crores between 18th March and 20th March. This REIT IPO got listed on 1st April 2019 at a premium and closed on day one, 5% above the allotted price.
It is backed by Indian real estate developer Embassy Group and U.S based Blackstone Group.
The unit price was within the range of Rs.299 to Rs.300 and the application was to be made for a minimum lot size of 800 units, which meant that the minimum amount to be invested was Rs. 2.4 lakhs.
This initial lot size could be increased by 400 units for investment by an investor.
|REIT||Embassy Office Parks|
|Sponsors||The U.S based Blackstone Group & Indian real estate developer Embassy Group|
|Subscription Date||18th March to 20th March 2019|
|Listing Date||2nd April 2019|
|Minimum Lot Size||800 units|
|Allotment Price||Rs. 300 per unit|
A Real Estate Investment Trust (REIT) is a company that owns, operates or finances income-producing real estate.
This instrument is like mutual funds and gives the investors an opportunity to own units of valuable real estate, get dividend-based income, total returns and helps the society grow.
The investors invest in a business trust which is basically Real Estate Investment Trust (REITs) or Infrastructure Investment Trust (InvITs) who in turn derives their income in form of rental income, dividend and interest by investing in Special Purpose Vehicles (SPVs).
The IPO was subscribed 2.58 times, with institutional investors subscribing 2.15 times of the investment portion allocated to them. The portion allocated for high net-worth individuals and retail investors was subscribed 3.1 times.
Three days before the IPO subscription opened, REIT raised Rs 1,743 crores by giving units to institutional investors as part of its anchor book allocation.
Before the IPO, the anchor book is allotted to institutional investors on a voluntary basis to check the interest of institutional investors.
Anchor Investors include Fidelity International, Aviva Investors, TT International and Schroders Small Cap World Fund, Prusik Umbrella UCITS Fund, Capital Group, American Funds Insurance, Jupiter Asian Income, TT Emerging Markets Equity, Signature High Income, Bottle Palm Private Beneficiary Trust, Mine Superannuation, DB International (Asia), Japan Trustee Services Bank, Wells Fargo, Morgan Stanley.
It also saw investments from Kotak Mahindra Life Insurance Co. Ltd and the family office of Radhakrishna Damani for the anchor book.
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The Embassy REIT’s portfolio has about 33 million square feet of office space across 7 office parks and 4 prime city-center office buildings as on 31st December 2018.
It includes amenities like 2 completed and 2 under-construction hotels with 1,096 rooms. It also has food courts, employee transportation, and childcare facilities.
This REIT’s portfolio is highly stabilized with an occupancy rate of 95% and more than 160 bluechip tenants. It has 11 office assets in Mumbai, Pune, Bengaluru, and Noida.
The net proceeds from the issue will be used for payment of bank’s debt of certain SPVs, payment of consideration for the acquisition of Embassy One’s assets currently held by Embassy One Developers.
Post utilizing the IPO proceeds, the debt of the company will come down.
The unit of the REIT closed at Rs. 314.67, making a gain of 5 %, after touching a high of Rs. 324.80, which was 8.3 % above its allotment price of Rs. 300. This is a good start for a new product.
As people begin to understand this product little more, it will result in a better response from the market.
The idea of REITs in our country was first raised in the year 2007, with draft guidelines issued by the regulator SEBI.
The global crisis of 2008 combined with confusion over tax norms led to a setback. Between 2014 and 2016, guidelines were revised many times to address the issue and bring clarity to tax implications.
Between 2015 and 2016 there were some movements to address the issues and bring clarity. Latest amendment was made in March 2019 to reduce the minimum investment amount from Rs. 2 lakhs to Rs 50,000.
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Unlike most IPOs, where the minimum investment amount for a retail investor is close to Rs. 15,000, the first REIT IPO came out with the minimum investment amount for retail investors close to Rs. 2.4 lakhs.
This makes it out of reach for many.
This can also be taken in a positive way as only those retail investors who are willing to take a risk by investing in a REIT should go ahead with it and other small investors should at least avoid investing in it in the beginning when it is a comparatively new concept in our country.
Investment in real estate requires a capital investment which is not possible for everyone to make. The REITs give an option to those investors to diversify their portfolio by investing in this asset class. Investment in REITs is transparent for retail investors due to regulations.
Interest received by the REIT from Special Purpose Vehicle (SPV) will be fully exempt and SPV will not have to deduct TDS on such interest.
Rental Income of REIT from renting of the real estate owned by the REIT will also be exempt. Dividend received from SPV will also be exempt u/s 10(34) but if the dividend is more than Rs.10 lakhs then it shall be taxable in excess of Rs. 10 lakhs.
All other income of REIT will be taxable as LTCG, STCG depending on the duration.
The interest received by the investor from REIT is taxable at 5% for non-residents.
Rental income received by the investor from REIT will also be taxable as it was exempt when it was received by REIT. Income other than interest income and rental income will be exempt in the hands of investors, when received from REIT.
REITs are needed to distribute at least 90 % of their taxable income to shareholders every year in the form of dividends, which is tax-free in the hands of the investors.
When units of REIT is listed on the stock exchange, they are transferred by the investor and STT is paid. Then, LTCG with 10% tax in excess of Rs. 1 lakhs and STCG with 15 % tax will be charged in the hands of the investor.
LTCG in case of units or REIT is considered when the units are held for more than 3 years from the date of acquisition of units.
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The positive response from investors will help build confidence among other domestic and global investors to consider investing in REITs in India.
This will also help the real estate sector of our country which is facing a cash crunch due to unsold inventories and less demand. Successful listing of this REIT will pave way for many more such listings in the years to come.
Disclaimer: The views expressed in this post are that of the author and not those of Groww