Union budget 2021: investments in REITs, InvITs made attractive; easier capital increase

Indian Union Budget 2021-22: Investments in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVIT) have been made more attractive, while deepening their opportunities to raise capital. Trusts can now raise debt capital at competitive rates, while the payment of dividends to REITs and InVITs has been exempt from withholding tax (TDS). Debt financing of InVITs and REITs by foreign portfolio investors (REITs) will be made possible by making the appropriate changes to relevant legislation. Until now, REIT regulations allow them to invest in non-convertible bonds (NCDs) issued only by a legal person. Since InVITs and REITs are trusts, REITs could not subscribe to debt securities issued by them a few years ago, although Sebi (Securities and Exchange Board of India) authorized InVITs and REITs. to start transmitting NCDs.

Experts say the announced measures corrected an anomaly between REIT regulation and Sebi’s REIT and InVIT regulation, which had led many REITs to be unable to subscribe to CRSs issued by these entities. While REITs were willing to provide debt capital, there was no way for it. Shagoofa Rashid Khan, Investment and Advisory (Fund) Manager Cyril Amarchand Mangaldas, told FE that even when Embassy REIT wanted to issue NCDs, REITs could not invest because there were no enabling regulations in place. under REIT regulations for them to invest. Khan added that this will pave the way for debt capital for REITs and InVITs, and they will have the ability to raise competitive capital from large investors who don’t necessarily need to take equity exposure. “Some of the pension funds and sovereign wealth funds that want to debt finance infrastructure can now get a bundle of stabilized assets under an InVIT or a REIT,” she said.

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As for trusts, they can replace expensive debt with cheaper debt. “This opens up opportunities for refinancing or restructuring the underlying portfolio,” Khan said. Chintan Patel, partner and manager (building construction and real estate), KPMG India, called this an important step that will enable monetization and give a boost to the creation of more InVIT and REIT. Vikas Chaturvedi, CEO of Xanadu Realty, said: “The expected inflow of funding will accelerate the dynamics of commercial real estate and make it a lucrative asset class.

The budget also proposed that in order to facilitate compliance, the payment of dividends to the REIT and InVIT be exempt from TDS.

Gaurav Karnik, National Leader (Real Estate Practice), EY, explained that in a REIT and InVIT structure, there is a trust, below which is a special purpose vehicle or SPV that holds the assets. Due to an anomaly in the law, when the SPV paid a dividend to InVIT or REIT, there would be a withholding tax, which would then have to be claimed as a refund. “Today, they clarified that for simplicity’s sake, dividends credited or paid to InVIT or REIT will not be subject to any withholding tax,” Karnik said. The rate of withholding tax is 10% plus the surcharge. The industry has welcomed this decision. Shishir Baijal, Chairman and CEO of Knight Frank India, said: “Easing tax compliance for REIT investors will further improve the marketing of these products, as we will likely see new REITs this year.” Jaxay Shah, Chairman of CREDAI National, said the TDS exemption will encourage individual retail investors to explore REIT investment opportunities.

According to Manish Gupta, senior director of CRISIL Ratings, the proposal to allow debt financing by foreign portfolio investors will make it easier to access finance for InvITs and REITs. In addition, the removal of TDS on dividend payments to InvITs and REITs should facilitate compliance and improve the efficiency of these channels. InVITs and REITs are gaining ground in India with their combined assets under management (AUM) reaching Rs 2 lakh crore. CRISIL Ratings expects its AUM to reach Rs 10 lakh crore over the next five years.