Photo of Arjun Lall

Partner (Head - South) at the Bangalore office of Cyril Amarchand Mangaldas. Arjun specializes in capital markets, M&A and private equity. He has advised on several landmark pioneering and ‘first of its kind’ capital markets transactions in India over the last eighteen years, including on the establishment and listing of the first REIT. He has been consistently ranked in legal publications as one of the leading capital market lawyers in the country. He can be reached at arjun.lall@cyrilshroff.com.

  Taxation of REITs in India

 

*An eight-part series covering the commercial and legal considerations of REIT listings in India. Click here to read Part III.

The Government started putting in place a framework for taxation of business trusts even before the regulations governing Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) were notified by the Securities Exchange Board of India (SEBI). This was not without reason – progressive regulations and tax reforms have influenced the progress of REITs globally, with REIT markets witnessing sudden growth spurts in countries such as Singapore and Hong Kong almost immediately following favourable tax amendments.

Closer home, five years and multiple amendments later, the Indian tax regime for REITs is a complex proposition and comes with a wishlist from nearly all stakeholders involved in a typical REIT. With Indian real estate likely to provide investment opportunity worth up to USD 77 bn through REIT-eligible commercial office and retail properties across India’s top seven cities by 2020[1], there can be no better time to look at some of the key issues.
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REIT IPO Exit

*An eight-part series covering the commercial and legal considerations of REIT listings in India. Click here to read Part 2.

Institutional investors have demonstrated a steadfast interest in Indian real estate in recent years. Private equity investments in the real estate sector peaked at $2.5 billion in the first quarter of 2019 – the highest since 2008.[1] With the lion’s share of investments being cornered by commercial office spaces, retail and hospitality sectors, the introduction of the Real Estate Investment Trust (REIT) framework in India comes at an opportune time, providing investors with an additional avenue for potential exits.

However, as the dust settles over India’s first REIT listing, it is now apparent that a REIT IPO is vastly different and distinct from an IPO by a company in many respects. Given the inherent intricacies and nuances of the REIT framework, investors seeking to exit via a REIT listing will need to re-calibrate, re-assess, and re-think their investment strategies, holding structures, investment documentation as well as exit horizons to expediently navigate the new regime.
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What’s So Real About Real Estate Anyway?

*An eight-part series covering the commercial and legal considerations of REIT listings in India. Click here to read Part 1.

India is an outlier in global Real Estate Investment Trust (REIT) regimes. It is the only country with dedicated legislation for REITs and Infrastructure Investment Trusts (while the US and Japan permit REITs to hold certain infrastructure assets, there is no separate legislation). In a way, this showcases the maturity of the regulatory thought process, and it has already been recognised that there is a compelling case for other developed jurisdictions to introduce a similar InvIT model, which meets the needs of investors as well as protects existing REIT legislation (Source: EY – Global perspectives, 2018 REIT Report).

On a standalone basis, ‘non-traditional’ REITs listed only in the US are the second-largest REIT sector globally (with a market cap of USD 480 billion). These non-traditional asset types include healthcare, data centres, billboards, communication towers, student accommodation, single family rental and fiber optic transmission lines (Source: EY – Global perspectives, 2018 REIT Report). Surprisingly, if most of these asset classes were to plan a REIT listing in India, they would have to think twice – their assets may or may not be eligible ‘real estate’ within the meaning of the REIT Regulations. Which brings us to the question, what exactly is real estate for the purpose of the REIT Regulations?


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Part I - REIT Management Frameworks

*This is the first part of an eight-part series covering the commercial and legal considerations of REIT listings in India

Setting up a Real Estate Investment Trust (REIT) involves a number of synchronised actions by all parties to the REIT including the Sponsors, Sponsor Group, Trustee, Manager, Special Purpose Vehicles (SPVs) and their respective stakeholders.

Apart from settling the trust, one of the principal obligations of the Sponsors includes contribution of the initial portfolio of assets to the REIT (immediately preceding the closure of the public issue). While the assets may be transferred through various means, the favoured (and tax efficient) option is for the Sponsor to swap its shares in the SPVs housing the portfolio assets in exchange for REIT Units. Thus, the REIT becomes the shareholder and owner of the assets, the Sponsors become Unitholders of the REIT and the REIT Manager (which is typically controlled/ managed by the Sponsors), is entrusted with the responsibility of managing the affairs of the newly acquired assets, through an investment management framework.
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