RMZ Corp, a landlord to Google Inc and Boeing Co in southern India, is planning to take its rent-yielding assets public in the first quarter of 2016 after the government last year announced rules to set up real estate investment trusts.
Where it will list the trust is another issue.
RMZ, whose investors include Qatar Investment Authority and Barings Private Equity Partners, will consider selling units in Singapore if the Indian government doesn’t reduce taxes on REITs, RMZ Managing Director Raj Menda said.
The development of Indian REITs, with US$20 billion worth of potential listings, has been hindered by tax rules that limit their appeal to investors.
Changes announced by Finance Minister Arun Jaitley in the budget for the fiscal year starting April 1 haven’t meaningfully improved the situation.
“Indian REITs are a non-starter with the taxes,” said Adhidev Chattopadhyay, a Mumbai-based property analyst at Elara Securities (India) Pvt.
“REITs will need to beat returns from other financial products.” A trust would yield investors about six to seven percent, compared with eight to nine per cent on bank deposits or some Indian government bonds, he said.
The Securities and Exchange Board of India, or SEBI, the market regulator, released rules for establishing REITs last September, giving investors the ability to participate in the country’s property market without investing directly.
Capital Gains Jaitley in his budget speech last month proposed to “rationalise the capital gains regime” when listing trusts and offered tax incentives on their rental income.
He didn’t, however, address corporate taxes and levies relating to dividend distribution and taxes incurred when a sponsor seeks to transfer assets to the REIT.
India’s proposals for REITs don’t match models in the US, Australia, Japan and Singapore, Menda said in a phone interview from the company’s headquarters in Bengaluru, the city formerly known as Bangalore.
“Hopefully, these will now go through in the next budget, otherwise we will have to explore a Singapore listing,” he said.
The next Indian budget will be presented in early 2016.
REITs have the potential to provide a new source of cash to Indian developers that have struggled to reduce debt with interest rates among the highest in Asia, while giving investors the ability to buy into the country’s property market.
Assets qualified to be included in REITs may reach US$20 billion by 2020, according to property broker Cushman & Wakefield Inc.
Japan, Singapore The REIT market in the Asia-Pacific region is valued at more than $250 billion, according to data compiled by Bloomberg.
Australia, Japan and Singapore are the region’s three-largest REIT markets, the data show.
There are 34 REITs and business trusts listed in Singapore.
SEBI released the first draft of guidelines for REITs in 2008.
Those never got final approval because of a lack of clarity on taxes and the impact of the global financial crisis on the investment climate, according to Knight Frank LLP.
RMZ received US$300 million of investment from Qatar’s sovereign wealth fund in 2013.
Barings Private Equity Partners has invested $100 million.
“Our partners want the assets to be lined up for an exit,” Menda said.
The founders also may look to buy back positions of some partners, Menda said.
Closely held RMZ has 20 million square feet of office space planned for the listing.
The company’s annual rental income may exceed 10 billion rupees (US$160 million) by year end, Menda said.
‘Huge’ Potential Indian office assets may yield an annuity income of about six perc ent and capital appreciation of about 10 percent to 12 per cent, Menda said.
Bengaluru, a hub for information technology and financial services companies, is India’s biggest office market with 100 million square feet of office space, according to CBRE Group Inc.
Bengaluru was the most active leasing market in the Asia-Pacific in the fourth quarter, accounting for a third of all space leased in the region, according to CBRE.
“Grade-A commercial assets in all of India are less than what you have in Manhattan, so the potential is huge,” Menda said.
“Still, we will most likely have to wait until next year’s budget for the tax changes to come through.” — Bloomberg