Indian REITs still burdened by tax rules, says APREA

India’s REIT regime is one step closer to market acceptance but remains burdened by inefficient tax rules, according to the Asia Pacific Real Estate Association (APREA).

The country’s 2015 Budget – including the alignment of capital gains tax treatment of corporate and REIT IPOs – was last week passed by Narendra Modi’s government. 

The Budget removed the issue of capital gains tax for sponsors and allowed ‘pass-through’ on rental income.

However, capital gains tax will apply on the direct transfer of real estate to these trusts. 

Plans for REITs were approved last year following India’s general election.

The draft REIT regulations – first drawn up in late 2013 – were quickly endorsed in India’s first Budget statement.

The move was at the time welcomed by Peter Verwer, chief executive at APREA.

Verwer this week said investors would embrace the Modi government’s decision to tax REIT income in the hands of beneficiaries, while the market, APREA said, had welcomed news that capital gains tax would be streamlined.

Verwer, however, highlighted several problems with the proposed tax treatment of REITs.

“Unfortunately, we can’t give two thumbs up to the REIT rules,” he said.

“While the Budget has sensibly aligned the capital gains tax treatment of REIT IPOs and corporate IPOs, it continues to apply a Minimum Alternate Tax (MAT) on the notional capital gain that can occur when setting up a REIT.”

APREA also said the “common practice” for REITs to hold assets via special purpose vehicles (SPVs) was open to penalty.

REITs that employ the practice, it said, are penalised whenever income is distributed from SPVs back to a parent fund.

“APREA argues that internal transfers of income should not trigger Dividend Distribution Tax (DDT),” Verwer said.

“It makes sense to exempt REITs from DDT, which unfairly reduces investor returns.

“Unless the artificial discounting of returns due to inefficient taxes is addressed, it will be difficult to kick-start a dynamic REIT market in India.”

Verwer said there was “tremendous interest” from investors and sponsors in fostering a vibrant REIT market on the subcontinent.

Reports in the Indian press suggest Embassy-Blackstone, Kotak Realty Fund and Red Fort Capital are considering REIT listings.

“Unfortunately, despite some positive Budget announcements, it remains very difficult to join the economic dots on a REIT structure that will deliver attractive returns,” he said.

In a report last year, advisory firm CBRE said a successful REIT market would require “strong support” from existing landlords, as potential issuers, and investors, as well as favourable market conditions.

The Indian REIT market needs to be seen as competitive regarding pricing and asset quality compared with the direct real estate market and other investment asset classes, CBRE’s report concluded.