Download - India REIT Budget Takeaways
-
7/25/2019 India REIT Budget Takeaways
1/8
JM Financial Institutional Securities Limited
I-REITS: Building blocks in place
Indian Government announced amendments in Finance Bill/Income Tax Act
to facilitate the introduction of Real Estate Investment Trusts. The issuesaround double taxation, capital gains on transfer of SPVs to REITs, and
treatment of REITs as security products have been addressed. I-REITs are
one step closer to reality now, though further clarity is required on foreign
investment in REITs and treatment of income at SPV level. As mentioned in
our report I-REITs- Potential to recycle assets worth 3% of GDPsuccess of
REITs will be subject to quality of asset injection in REITs and going in cap
rates of these assets.
Tax pass-through approved: REITs have been granted tax pass-through
status by the Finance Ministry which means REITs are not liable for any tax on
income distributed. The tax will be collected at unitholdersend. Without tax
transparency, income of REIT units would have been subjected to double
taxationfirst, at the corporate level, and then, at the dividend distributionlevel (17%). The returns on REITs will now be contingent on the unit-holder
tax structure. In addition tax deduction at source for dividends distributed by
REIT will be at 10% and 5% for Residents and Non-Residents respectively.
However clarity is required on treatment of income at Special Purpose Vehicle
(holding commercial asset) and its pass through status.
Capital gains on transfer of SPV to REITs exempted:A direct transfer of the
property to be securitized to the trust vehicle will attract capital gains tax on
revaluation of property in current tax regime. Provisions in Finance Bill
provide for exchange of REITs units for shares of SPVs (holding rent yielding
assets) capital gains tax exemption. Waiver of capital gains was essential for
making REITs attractive for asset owners as it reduces the entry cost for
developers tapping the REITs channel. However clarity on tax relating to the
acquisition and disposal of assets by REITs is awaited.
REITs to be treated at par with equity securities:Another key amendment
essential for success of REITs as a tradable unit was its tax treatment as
compared to equities when transacted on exchanges. Level playing field has
been provided for taxation of sellers and purchasers on trading of REIT units
as in case of listed securities thus making them at par with equities (benefits
from favourable long term gains in-line with equity shares).
Way forward - Strong building blocks for REITs in place: Based on our
analysis of global REITs in our Report I-REITs- Potential to recycle assets
worth 3% of GDPdated 3 July14, key triggers for REITs success has been
tax transparency, exemption from capital gains tax and treatment of units atpar with equities. With MoF taking steps to address these issues we believe
REITs are likely to become a reality in the coming months. While clarity on
foreign participation and treatment of SPV income is still required, success of
REITs will be contingent on the quality of assets injected in REITs platform
and going in cap rates for these assets. In addition investors need to monitor
the checks in place for related party transactions and aligning the interest of
Asset Manager with unitholders.
E1.Vicky JM Financial Research is also available
Bloomberg - JMFR , Thomson Publisher & Reute
Please see important disclosure at the end of the rep
Abhishek Anand, [email protected]
Tel: (91 22) 663030
India REITs
10 July 2014
India | Real Estate | Flash Update
http://jmflresearch.com/JMCRM/analystreports/analyst%20documents/India_REIT_%20Potential_03_07_2014.pdfhttp://jmflresearch.com/JMCRM/analystreports/analyst%20documents/India_REIT_%20Potential_03_07_2014.pdfhttp://jmflresearch.com/JMCRM/analystreports/analyst%20documents/India_REIT_%20Potential_03_07_2014.pdfhttp://jmflresearch.com/JMCRM/analystreports/analyst%20documents/India_REIT_%20Potential_03_07_2014.pdfhttp://jmflresearch.com/JMCRM/analystreports/analyst%20documents/India_REIT_%20Potential_03_07_2014.pdfhttp://jmflresearch.com/JMCRM/analystreports/analyst%20documents/India_REIT_%20Potential_03_07_2014.pdf -
7/25/2019 India REIT Budget Takeaways
2/8
India REIT 10 July 20
JM Financial Institutional Securities Limited Page
REIT Structure
Exhibit 2. REIT structure
SPV holding income generating
asset
Other Income
Income From
SPV
Other Income
Unit Holders
Income received orreceivable by REIT
No tax to be paidby REIT
Maximum marginal Tax rateto be paid by REIT
Distribution
Maximum
Marginal Taxrate paid byunit holders
No Tax paid byunit holders
No capital gains ontransfer of share inexchange of REITs
units
Source: JM Financial
Key amendments introduced in Finance Bill
Finance Bill has included special clauses for introduction of business trusts
(REITs and Infrastructure Investment Trust) in order to enable the evolution of
these avenues. We have analysed the key changes/incorporations in Finance
Bill and Income Tax act introduced by the Government below.
Section 47: Transactions not regarded as transfer (capital gains
exemption)
SPV transfer of shares for units of REITs is exempt from capital gains tax.Excerpts from the Finance Bill:
Exhibit 3. Section 47 amendments- Capital gains exemption
* Section 47 (xvii)- any transfer of a capital asset, being share of a special purpose vehicle
to a business trust in exchange of units allotted by that trust to the transferor.
* in the case of a capital asset, being a unit of a business trust, allotted pursuant to transfer
of share or shares as referred to in clause (xvii) of section 47, there shall be included the
period for which the share or shares were held by the assessee;
Source: MoF, JM Financial
Section 10: Incomes not included in total income (tax-pass through status
to REITs)
REIT has been granted tax pass through status with tax at the unitholders endthus doing away with the policy of double taxation and benefitting holders withlower marginal tax rates. However any income arising out of transfer of units forshares of SPV will be taxed at marginal Excerpts from the Finance Bill:
-
7/25/2019 India REIT Budget Takeaways
3/8
India REIT 10 July 20
JM Financial Institutional Securities Limited Page
Exhibit 4. Section 10 Amendments: Tax pass through status to REITs
* After clause (23FB), the following clauses shall be inserted, namely:
(23FC) any income of a business trust by way of interest received or receivable from a
special purpose vehicle.
(23FD) any distributed income, referred to in section 115UA, received by a unit holder from
the business trust, not being that proportion of the income which is of the same nature as
the income referred to in clause (23FC);
In clause (38) Provided further that the provisions of this clause shall not apply in respect
of any income arising from transfer of units of a business trust which were acquired in
consideration of a transfer referred to in clause (xvii) of section 47
Source: MoF, JM Financial
Section 111A Tax on short-term capital gains not applicable on transfer
of assets
It is proposed that the provisions of Short term capital gains shall not apply inrespect of any income arising from transfer of units of a business trust which
were acquired by the assessee in consideration of a transfer.
Exhibit 5. Section 111A Tax on short-term capital gains not applicable
Provided further that the provisions of this sub-section shall not apply in respect of any
income arising from transfer of units of a business trust which were acquired by the
assessee in consideration of a transfer as referred to in clause (xvii) of section 47.
Source: MoF, JM Financial
Special Provisions- Introduced for business trusts
Special provisions are introduced clarifying the tax at unitholders end. In additionany income other than that earned by dividends from SPVs will be taxed atmarginal tax rate at REITs end. Such income, when distributed at unit holders end will be tax exempted.
Exhibit 6. Special enabling provisions
115UA. (1) Notwithstanding anything contained in any other provisions of this Act, any
income distributed by a business trust to its unit holders shall be deemed to be of the same
nature and in the same proportion in the hands of the unit holder as it had been received
by, or accrued to, the business trust.
(2) Subject to the provisions of section 111A and section 112, the total income of a business
trust shall be charged to tax at the maximum marginal rate.
(3) If in any previous year, the distributed income or any part thereof, received by a unit
holder from the business trust is of the nature as referred to in clause (23FC) of section 10,
then, such distributed income or part thereof shall be deemed to be income of such unit
holder and shall be charged to tax as income of the previous year
Source: MoF, JM Financial
-
7/25/2019 India REIT Budget Takeaways
4/8
India REIT 10 July 20
JM Financial Institutional Securities Limited Page
Tax deducted At source
REIT will deduct 5% and 10% TDS for non-resident and residents before
disbursing dividend.
Exhibit 7. Tax deducted before dividend payout
Inserted section 194LBA
(1) Where any distributed income referred to in section 115UA, being of the nature referredto in clause (23FC) of section 10, is payable by a business trust to its unit holder being a
resident, the person responsible for making the payment shall at the time of credit of such
payment to the account of the payee or at the time of payment thereof in cash or by the
issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax
thereon at the rate of ten per cent.
(2) Where any distributed income referred to in section 115UA, being of the nature referred
to in clause (23FC) of section 10, is payable by a business trust to its unit holder, being a
nonresident, not being a company or a foreign company, the person responsible for making
the payment shall at the time of credit of such payment to the account of the payee or at
the time of payment thereof in cash or by the issue of a cheque or draft or by any other
mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent..
Source: MoF, JM Financial
Treatment at par with equities on transaction in exchanges
REITs will be treated at par with equity shares thus making the trading of REITs
units attractive especially for long term holders.
Exhibit 8. STT on transactions in units of REIT similar to equities
Clause 109 of the Bill seeks to amend Chapter VII of the Finance (No. 2) Act, 2004 which
deals with levy of securities transaction tax on transaction of equity shares of a company on
the stock exchange.
It is proposed to amend the said Chapter in order to provide levy of securities transaction
tax on transactions in units of a business trust on the same line as are applicable to
transactions in equity shares in a company.
Source: JM Financial
-
7/25/2019 India REIT Budget Takeaways
5/8
India REIT 10 July 20
JM Financial Institutional Securities Limited Page
Key triggers for success of REITs
Success of REITs despite all the benefits is contingent on a) policy support, and b)addressal of I-REIT specific issues.
a) Policy Support-
1) Tax treatment of REITs
Based on our study of international REITs market, Governments policies on
tax have been the key reason for propelling the REITs market. Key taxreforms necessary for making REITs attractive for the investors are 1)
Exemption from capital gains tax on transfer of assets to REIT (re-valuation of
assets)- Issue has been addressed an exchange of shares in SPV and trust
units; 2)Exemption from Local duties on transfer of assets (Stamp duty etc.);
3) Tax pass through for dividends paid by REITs (currently double taxation
with corporate tax and DDT); 4) Level playing field should be provided for
taxation of sellers and purchasers on trading of REIT units as in case of listed
securities and mutual funds.
Exhibit 9. Tax treatment
REIT Non-Transparent
REIT TaxTransparent-
marginal tax
REIT taxtransparent-
DDT
Operating income 100 100 100
Corporate tax @ 33.9% 34 0 0
After tax income 66 100 100
DDT@17% 11 0 17
Tax at unitholders end (33.9%) 0 34 0
Cash to shareholders 55 66 83
Increase in cash on tax transparency 20% 51%
Source: JM Financial
-
7/25/2019 India REIT Budget Takeaways
6/8
India REIT 10 July 20
JM Financial Institutional Securities Limited Page
2) Foreign investment in Indian REIT
FDI Policy to enable Foreign Portfolio Investment (FPI) and other investors to
participate in REITs and exempt REITs from conditions applicable to FDI in
Real Estate.
SEBI REIT Regulations allow for foreign participation provided that in
case of foreign investors, such investment shall be subject to guidelines as
may be specified by RBI and the government from time to time.
Currently, the FDI Policy does not envisage REIT structures.
FDI in Real Estate is allowed up to 100% under the automatic route already
allowed in Townships, Housing, Built-up Infrastructure and Construction-
Development Projects which includes Housing, Commercial Premises, Hotels,
Resorts, Hospitals, Educational Institutions, Recreational Facilities, City and
Regional Level Infrastructure.
Key Conditions for real estate:
Minimum area to be developed under each project of 10 hectares for
development of serviced housing plots and 50,000 square meters in case
of construction-development projects In case of a combination, any 1
condition would suffice.
Minimum capitalization of US$10mn for wholly owned subsidiaries and
US$5mn for JV with Indian partners.
Original investment cannot be repatriated before a period of three years.
100% FDI is allowed in Industrial parks (press note 3) provided the parks meet
certain conditions.
It should comprise minimum 10 units and no single unit should occupy
more than 50% area.
Minimum 66% of allocable area should be allocated to industrial activity.
FPI Regulations permit individual holding of Foreign Portfolio Investment (FPI)
must be below 10% of the total issued capital of the company.
FDI Policy is proposed to enable FPI and other investors to participate in REITs
and exempt REITs from conditions applicable to FDI in Real Estate.
-
7/25/2019 India REIT Budget Takeaways
7/8
India REIT 10 July 20
JM Financial Institutional Securities Limited Page
b) I-REIT specific issues
Bridging expectations gap: Bridging gap between investor returns
expectations (G Sec+100-300bps, Exhibit 15) and developer cost of funding
expectations (LRDs executed at 8-9% post tax). We believe a middle ground
can be reached in a REIT model as developers will have access to a larger
capital (covenants free) while investors have access to the assets with yield
and capital appreciation.
Exhibit 10. REITs spread over G-Sec rates in key geographies (bps)
145
180
233
278292
Australia U.S.A Japan Singapore Hong Kong
Source: Bloomberg, JM Financial
Checks in place for related party transactions: REIT managers are often
closely affiliated with REIT sponsors which can create a conflict of interest in
which the REIT manager may engage in acquisitions that serve more as an
attractive exit for the sponsors than an attractive investment case for unit
holders. Indian REIT draft regulation addresses this concern by making itmandatory to get unit holders approvals (related party voting not considered
during the voting process). In our view quality of assets injected by the REIT
trust will be critical for success of REITs.
Conflict of Interest - Aligning goals of REIT Manager and unit holders: In
addition there lies a conflict of interest between REIT managers and unit
holders as REIT manager compensation is generally linked to assets under
management. The issue can be addressed by better management fee
schedule, in our view, that more closely aligns the interest of REIT managers
and unit holders. Some of the ways of aligning interests of unit holders and
REIT managers are partial payment of manager fees in REIT units and linking
performance fees to growth in rentals.
-
7/25/2019 India REIT Budget Takeaways
8/8
India REIT 10 July 20
JM Financial Institutional Securities Limited Page
JM Financial Institutional Securit ies Limited(Formerly known as JM Financial Institutional Securities Private Limited)
Corporate Identity Number: U65192MH1995PLC092522
Member, BSE Limited and National Stock Exchange of India LimitedSEBI Registration Nos.: BSE - INB011296630 & INF011296630, NSE - INB231296634 & INF231296634Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com
Analyst(s) CertificationThe research analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; andNo part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or v iews expressed in this research report.I.
Analyst(s) holding in the Stock(s): (Nil)II.
Disclosures
This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securitie s) to provide information about the company(ies) and sector(s), if any, covered in the repomay be distributed by it and/or its affiliated company(ies) solely for the purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproor redistributed without the prior written consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein. JM Financial Institutional Securities and its afcompanies are part of a multi-service, integrated investment banking, investment management, brokerage and financing group. JM Financial Institutional Securities and/or i ts affiliated company(ies) might have pror may provide services in respect of managing offerings of securities, corporate finance, investment banking, mergers & acquisitions, financing or any other advisory services to the company(ies) covered hereFinancial Institutional Securities and/or its affiliated company(ies) might have received or may receive compensation from the company(ies) mentioned in this report for rendering any of the above services. Resanalysts and sales persons of JM Financial Institutional Securities may provide important inputs to i ts affiliated company(ies) associated with i t.
While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and JM Financial InstituSecurities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error information contained in this report. This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision. The investment discussed orexpressed herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM FinaInstitutional Securities reserves the right to make modifications and alterations to this statement as they may deem fit from time to time.
JM Financial Institutional Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) menherein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discuss ed herein oran advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.
This report is neither an offer nor soli citation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.
This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publiavailability or use would be contrary to law, regulation or which would subject JM Financial Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdictiosecurities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of aobserve such restrictions.
Persons who receive this report from JM Financial Singapore Pte Ltd may contact Ms. Rohinee Sharma ([email protected]) or Mr. Ruchir Jhunjhunwala ([email protected]) on +65 6422 1respect of any matters arising from, or in connection with, this report.
Additional disclosure only for U.S. persons: This research report is distributed in the United States by Enclave Capital LLC (Enclave Capital), a U.S. registered broker dealer, only to major U.S. institinvestors, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934 (the Exchange Act), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Comm
(SEC). This research report is not intended for use by any person or entity that is not a major U.S institutional investor. If you have received a copy of this research report and are not a major U.S institutional invyou are instructed not to read, rely on or reproduce the contents hereof, and to destroy this research or return it to JM Financial Institutional Securities or to Enclave Capital.
This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) r esponsible for the content of the research report. The research analyst(s) preparing the rereport is/are resident outside the United States and are not associated persons or employees of any U.S. registered broker-dealer. Therefore the analyst(s) are not be subject to supervision by a U.S. broker-deaotherwise is/are not required to satisfy the regulatory licensing requirements of FINRA and are not be subject to Rule 2711 of the Financial Industry Regulatory Authority (FINRA) or to Regulation AC adopted by thwhich among other things, restrict communications with a subject company, public appearances and personal trading in securities by a research analyst.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, JM FinaInstitutional Securities has entered into an agreement with a U.S. registered broker-dealer, Enclave Capital. Transactions in securities discussed in this research report should be effected through Enclave Capital.
Additional disclosure only for U.K. persons:Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the Financial Conduct Authority. As a result, this refor distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 200amended, the "Financial Promotion Order"), (ii) are persons falli ng within Article 49(2)(a) to ( d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (ii i) are outside the Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the mattwhich this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persomust not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which thi s report relates is available only to relevant persons and will be engaged in only with repersons.