What are REITs and InvITs?

Introduction

Real estate as an asset class has always been an excellent tool for people to accumulate wealth. However, this asset was just restricted to wealthy people due to large ticket size of property, therefore not all people could invest in property market and lacked behind their peers in terms of money. Middle class people could only dream of investing in prime real estate location. SEBI has eased the problem with the introduction of REITs and InvITs.

Now, with the innovation of REIT and InvIT all people can invest in prime location properties without digging up on their wealth. REITs allow retail investors to invest in high-end commercial real estate and minimum investment requirement has been kept very low. REITs have provided level playing field for all investors who want to invest in retail sector.

What are REIT and InvITs?

A REIT is a trust which pools money from investors and then invests the accumulated amount into the real estate. A REIT invests the money into real estate projects mostly in medium term gestation projects. Investors are liable to get dividends as returns by investing in REIT. It is a nice finance tool to take a bet on property markets and multiply their wealth. The structure is like the mutual funds however underlying asset here is physical real estate. Therefore, these are basically securities of real estate which are being traded on stock exchanges after getting listed. The first IPO of REIT was issued by Bangalore based enterprise Embassy Office Parks in March 2019.

InvITs are slightly different from REITs since InvITs invest in infrastructure projects like highways, roads, huge irrigation projects etc. InvITs in real estate sector are known as REITs. Whatever returns are generated from the investments are distributed to investors in the form of dividends. IRB infrastructure was the first enterprise to issue and IPO for InvITS in 2017.

The Structure of REITs and InvITS is mentioned below:

How do REIT and InvIT benefit the real estate and infrastructure sector?

Real estate and infrastructure projects require huge amount of capital investment right from the beginning until the project is completed. It is an obvious fact that these sectors are facing a lot of liquidity problems which makes entry and exit very difficult. These projects have long gestation time therefore completing a project and generating steady cash flows from these projects is a time taking process. Banks and NBFCs are already sitting on huge pile of bad infrastructure and real estate loans which restrict them to advance new loans to developers. Banks who are still willing to finance these projects require stringent procedures for granting loans which discourage developers to take loan. Additionally, there is lack of single devoted financial institution which can finance long term projects. Therefore, REITs and InvITs come to the rescue of the ailing real estate and capital-intensive infrastructure sectors. These allow developers a viable exit route by monetizing either the part of the project or the entire project. With the advent of REIT and InvIT, developers are able to transform their model into asset light model by reducing their balance sheet size and thereby improving the returns on investments. This will help in making these sectors self -sufficient in finance by reducing the dependency on external sources to finance their projects. Therefore, REITs and InvITs can play a huge role in minimizing the funding gaps in real estate and infrastructure sector.

What are the benefits for investors?

Both REITs and InvITs are new for Indian markets and have huge potential to grow. Investors can benefit from these sectors’ growth by investing in prime real estate assets which they could not purchase earlier. Investors trade through DEMAT account without the hassles of buying actual property. These are good sources for steady income and portfolio diversification.

Secondly, Institutional investors like Insurance Companies and Pension Funds also benefit from the growth of REITs and InvITs as they are viable investment options with low risk. They can finance their long-term capital requirement by investing in REITs and InvITs.

Thirdly, REITs and InvITs reduces the burden of the government since a large chunk of governments expenditure is being done on building infrastructure for the country. REITs and InvITs helps in channelizing the funds for the crucial infrastructure projects without exhausting government finances.

Economy benefits from REITs and InvITs since infrastructure possess a multiplier effect on GDP.

What is there in Union Budget 2021 for REITs and InvITs?

The Budget has exempted REITs and InvITs from tax deducted at Source (TDS) in order to ease the compliance related to dividend payouts. Budget provisions have made REITs and InvITs more attractive amongst the investors by allowing debt financing at competitive rates.

Foreign Portfolio Investors can also invest in REITs and InvITs as budget has asked concerned authorities to make required amendments in legislations. Experts are of the view that these provisions will help in the influx of fresh funding in the real estate and infrastructure which will further augment the funding of the projects at faster pace. TDS exemption provision announced by FM in Budget speech will certainly encourage more outside funds to invest in these sectors.

FM also hinted that InvITs may not be restricted to highways and roads transmission but can expand to renewable energy too. There is a provision of setting up a devoted finance institute for solely funding infrastructure projects. NHAI will also come up with its InvIT soon this year.

Tax Treatment for REITs and InvITs

1. Long Term Capital Gains are realized on the transfer of units of unlisted private InvITs shall be taxable at the rate of 10% for non-resident unitholders and 20% for resident unitholders if the units have been held for more than 36 months.

2. Short Term Capital Gains will be taxed at 30 for residents and 40% for non-resident corporates.

3. Dividend income is subject to tax in the hands of the shareholders, at the applicable rate and in case of SPV, it would be required to withhold tax on the same.

4. No tax is payable by unit holders if there is return of capital payment component in the income to unitholders.

Conclusion

There are lot of efforts being put to strengthen the infrastructure sector of India by the government. Government is easing compliance norms in order to attract the investors in REITs and InvITs. These sectors have tremendous potential for growth and generating high returns on investments. For retail investors, these offer diversification of risk from regular asset classes like equity, debt and gold. REITs and InvITs are excellent investment opportunities for both retail as well as long term institutional investors.

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