REITs and INVITs have been a success story globally and is the primary capital raising avenue for real estate assets and so its potential in India is obvious.
Since the pandemic, there has been a restructure in terms of investments, with the focus shifting from China to India as a preferred investment destination. The change provided a fresh impetus for the country’s commercial and manufacturing infrastructure development. As a result, India will attract more international investors and funds looking to invest in commercial real estate. With the real estate sector contributing 6-7 percent to the country’s GDP, which is only expected to rise in the coming years, there is plenty of room for investors to explore new opportunities in India, such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
Why REITs and InvITs?
Real estate and infrastructure become a key factor of growth in a fast-growing economy like India, where cities are rapidly expanding. Urbanisation is causing issuers to need a lot of cash, and REITs and InvITs are one way to get it. With low real interest rates in developed economies, it’s only natural for higher-return-seeking investors to turn to REITs and InvITs. In addition, more investors will take an interest in REITs and InvITs as a result of this.
REITs & InvITs – Carry High Growth Potential
India’s real estate and infrastructure sectors are booming. By 2025, India’s real estate sector is expected to reach $650 billion, contributing 13% of the country’s GDP, and by 2040, the real estate market will have grown to $9.30 billion (Rs 65,000 crore), up from $1.72 billion (Rs 12,000 crore) in 2019 (Indian Real Estate Industry Report, IBEF April 2021). Real estate and infrastructure are very attractive investment avenues for Indian investors seeking low-risk, high-yield returns.
Growing Impetus for REITs and InvITs in India
In India, there are currently 11 REITs and InvITs in operation, with 10 of them having AAA security ratings (highest level). Brookfield REIT (issue size of around $512 million – Rs 3,800 crore) became India’s third REIT in 2021. Even during the pandemic, net absorption of real estate was high, indicating that REITs are becoming a popular investment destination. The REIT sector will see an increase in dynamism, as well as public trust in them. REITs are likely to thrive in the Indian market this year as more companies go public.
Regulatory and Policy Boost
The Government of India (GoI) allowed foreign portfolio investors (FPIs) to enter the debt financing of REITs and InvITs in the Union Budget 2021-22 in order to make investments in REITs and InvITs more appealing and augment funds for the sectors. Dividend payments to REITs and InvITs were also exempt from Tax Deducted at Source to make compliance easier (TDS). Similarly, FPIs can now deduct tax on dividend income at a lower treaty rate.
The Sebi board approved amendments to REITs and InvITs regulations on June 29, 2021, including a reduction in the minimum subscription amount and trading lot from Rs 50,000 to a range of Rs 10,000-15,000, and a one-unit trading lot. Future public offerings will be encouraged by loosening of investment guidelines and increased liquidity. All of these measures will provide FPIs with a new way to invest in a developing market like India.
REITs and InvITs at IFSC – An Attractive Tool
The International Financial Services Centers Authority (IFSCA) has prescribed the regulatory framework for REITs and InvITs in the IFSC, with the goal of developing financial products and services in the Gujarat International Finance Tec-City International Financial Services Centre (GIFT IFSC). The GIFT IFSC will offer international trading of REITs and InvITs in October 2020. InvITs have also had the ability to raise funds through private placements. This opens up a slew of opportunities for REITs and InvITs registered at the GIFT IFSC to invest in global markets, as well as for international REITs and InvITs from India (outside IFSC) to trade on the recognised stock exchanges in the GIFT IFSC, subject to compliance with their home jurisdiction’s laws.
From a tax standpoint, REITs and InvITs at the IFSC are appealing. The consideration for the transfer, when made through the GIFT IFSC, is in foreign currency, so no tax is due. IFSC regulation governing REITs/InvITs has now taken effect, allowing it to develop a progressive ecosystem.
GIFT IFSC Strengthens India’s International Proposition
The IFSCA’s main goal is to build a strong global connection and focus on the needs of the Indian economy, as well as to serve as an international financial platform for the region and the world.
We applaud the IFSCA for allowing REITs and InvITs to list in the IFSC, which should increase IFSC’s business opportunities. Additionally, entities in the IFSC can benefit from the international growth of the real estate and infrastructure sectors. In addition to an expanded financial product range, GIFT IFSC also expects to attract retail investors. This will cement GIFT IFSC’s position as one of the world’s leading international financial centres.
REITs have been a global success storey and are the primary source of capital for real estate assets, so their potential in India is obvious. For foreign investors, REITs offer higher liquidity, higher interest rates, and portfolio diversification than direct investments. Emerging markets like India are proving to be far more profitable for REIT investments than developed markets. Furthermore, IFSCA’s proactive reforms are making the GIFT IFSC more accessible and appealing to both Indian and foreign investors.
Furthermore, the majority of Indian real estate companies will receive significant capital from foreign investors. Due to this, facilitating funds and generating higher returns creates a win-win situation for both parties (issuers and investors). India is set to become a global financial center with the formation of the GIFT IFSC.