How REITS, InvITs can reinvigorate India’s vision to become an international financial stronghold

Since the pandemic, there has been a rejig related to investments by global investors with the focus shifting to India from China as a preferred investment destination. The shift gave a new stimulus for commercial and manufacturing infrastructure development in the country. Thus, India is expected to attract more global investors and global funds, who are venturing into the commercial real estate investment space. With the country’s real estate sector contributing 6-7 per cent to the country’s Gross Domestic Product (GDP), which is only expected to move up further in the years to come, there is ample scope for the investors to explore the new opportunities in India – Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

Why REITs and InvITs?

In a fast-growing economy like India where cities are expanding at a rapid pace, real estate and infrastructure becomes a key factor of growth. Due to the rapid growth in urbanization, there is a dire need for huge capital and REITs and InvITs are a unique vehicle for issuers to access capital. For investors, with prevailing low real interest rates in developed economies, it is natural for higher return-seeking investors to look towards avenues such as REITs and InvITs. Hence, it is only a matter of time that we will see a greater number of REITs and InvITs come up and more investors looking to invest in them.

REITs & InvITs – Carry High Growth Potential

Real Estate and Infrastructure in India is growing at a fast rate. Real estate sector in India is estimated to touch $650 billion and thereby contribute 13 percent of India's gross domestic product (GDP) by 2025, and by 2040, the real estate market will grow to $9.30 billion (Rs 65,000 crore), which was at $1.72 billion (Rs 12,000 crore) in 2019 (Indian Real Estate Industry Report, IBEF April 2021). Looking at these numbers, it is evident that the Real Estate and Infrastructure market is a very viable avenue for investors and with more and more Indians looking to invest in low risk-high yield options.

Growing Impetus for REITs and InvITs in India

Currently, there are about 11 REITs and InvITs in operation in India out of which 10 have AAA level security (highest level). India began 2021 with the successful launch of the country’s third REIT – Brookfield REIT (issue size of around $512 million - Rs 3,800 crore)). Even during the pandemic period, the net absorption of real estate was quite high, indicating that REITs are heating up as a destination for investment. This will only further fuel the real estate sector that adds to the domestic and global community’s confidence in REITs. With more REITs to be listed this year, India’s REIT market is all set to enter a new growth phase.

Regulatory and Policy Boost

In the Union Budget 2021-22, the Government of India (GoI) in order to make investments in REITs and InvITs more attractive and augment funds for the sectors, permitted foreign portfolio investors (FPIs) an entry into the debt financing of REITs and InvITs. Further, in order to provide ease of compliance, dividend payments to REIT and InvIT were exempted from Tax Deducted at Source (TDS). Similarly, for FPIs, deduction of tax on dividend income at lower treaty rate was enabled.

Sebi board (held on June 29, 2021) approved amendments to REITs and InvITs regulations for revision in minimum subscription amount and trading lot, with the minimum application value to be brought down from Rs 50,000 to a range of Rs 10,000-15,000 and the revised trading lot shall be of one unit. The relaxation in investment norms is expected to improve liquidity, bring in more retail investors and encourage more public listings in the future. All these measures will also open a new avenue for FPIs to invest in a growing market like India.

REITs and InvITs at IFSC - An Attractive Tool

The International Financial Services Centers Authority (IFSCA), with an objective to develop the financial products and services in the Gujarat International Finance Tec-City International Financial Services Centre (GIFT IFSC) has prescribed the regulatory framework for REITs and InvITs in IFSC. IFSCA in October 2020, introduced new guidelines allowing REITs and InvITs registered in India or another foreign jurisdiction to operate globally through recognized exchanges in GIFT IFSC. Additionally, InvITs have been permitted to raise funds through private placements also. This opens up a whole host of opportunities for the REITs and InvITs registered at the GIFT IFSC to invest in global markets and likewise international REITs and InvITs or REITS and InvITs from India (outside IFSC) to trade on the recognized stock exchanges in GIFT IFSC subject to compliance with their respective laws of home jurisdiction.

REITs and InvITs at IFSC carries an appeal from an income-tax perspective. Transfer by a non-resident of units of an InvIT/ REIT on a recognized stock exchange in GIFT IFSC shall not be chargeable to tax where the consideration for such transfer is paid in foreign currency. With the regulatory framework for listing of REITs/ InvITs in an IFSC now in place, an impetus is provided for the development of a progressive ecosystem at the IFSC.

GIFT IFSC Strengthens India's International Proposition

The main objective of the IFSCA is to develop a strong global connect and focus on the needs of the Indian economy as well as to serve as an international financial platform for the entire region and the global economy.

IFSCA enabling listing of REITs and InvITs in the IFSC is an encouraging move and may provide an overall impetus to various business opportunities available in the IFSC. Further, the entities in IFSC can participate and benefit from the growth of real estate and infrastructure sector in international jurisdictions. A bigger basket of financial services and products along with increased retail participation will help in positioning GIFT IFSC as an attractive trading and investment destination. This is set to elevate GIFT IFSC as one of the leading international financial centres in the world.

Way Forward

REITs has been a success story globally and is the primary capital raising avenue for real estate assets and so its potential in India is obvious. REITs builds up a case for higher liquidity, higher interest rate and portfolio diversification as opposed to direct investing, in turn reducing risk for a foreign investor. As we look towards the new normal, REIT investments are proving to benefit investors much more in emerging markets like India in comparison to developed markets. On top of that IFSCA with its proactive reforms is making GIFT IFSC more accessible and attractive for both Indian and foreign investors alike.

Moreover, most Indian real estate companies are going to get significant capital from foreign investors. Thus, creating a win-win scenario for both the parties (issuers and investors) through facilitating funds and creating higher returns in the process of investment. With GIFT IFSC set to take the next big step, India is ready to become an International financial stronghold.