How Reits can succeed in India

Author: Ashley Lee | Published: 17 Dec 2013
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  • Market participants are excited by India’s draft regulations for real-estate investment trusts (Reits) as they address a growing market;
  • But the country’s tax authority must include incentives for the investment vehicle to succeed;
  • Retail investors might look to Reits as they are considered safe investments, but yield-based instruments have not taken off in India;
  • Panellists at IFLR's India Capital Markets Forum encouraged regulators to diversify the assets that Reits can invest in include to hospitals;
  • Business trusts are also a possibility, with infrastructure assets of particular interest.

Panellists at last week’s India Capital Markets Forum agreed that the introduction of real-estate investment trusts (Reits) would benefit the local market. They also focused on how the investment vehicle might pave the way for business trusts in India

Reits have been very popular in Singapore, which has developed into Asia's Reit and business trust hub. Several Indian companies have listed Reits on the Singapore Exchange, but the Securities and Exchange Board of India (Sebi) has recently issued draft regulations for Reits in India.

Speakers at IFLR's India Capital Markets Forum, however, said it was unclear whether the investment vehicle would take off in the domestic market due to the heavily-regulated real-estate market. Panellists hoped that the introduction of Reits might usher in business trusts, which they considered a more promising product.

"The Reit regulations are a positive, and bring new products to the market," said Luthra & Luthra's Manan Lahoty. "Innovation is important, as are products where we know there are interested buyers."

"This is a good first draft," he added. "But it's important to note that it's still a first draft."

Further reading

India Capital Markets Forum – key takeaways

Asia Capital Markets Forum highlights

India’s new Companies Act to change CSR

A product of the future?

While the Reit regulations were praised for introducing a new and more sophisticated instrument to the Indian market, panellists warned that India's tax authority must approve incentives for Reits to be successful.

Speakers agreed that Reits were safer investments than straight equity, and might attract a significant number of retail investors.

Amit Thawani, executive director at Nomura Financial Advisory & Securities, noted that India had reached a stage where there was a fairly large quantum of assets in the country that could be folded into a Reit. He said that a path should be cleared for those.

But there were some challenges, he added, including greater clarity on whether for asset classes such as hospitals could be folded into a Reit platform.

Other panellists said that it might take some time to develop a yield-based product market in India.

Ranganath Char, managing director of investment banking at JM Financial, predicted that there would be a few Reit transactions after the regulations were announced. But, he said, this is a product of the future.

A lot of effort had gone into developing yield products in India, said Char, but they haven’t gained the momentum expected. For example, market participants have seen a lot of legislation related to listing public or private debt, but that hasn't taken off beyond a few issuers in the banking and financial services space.

"We need to see whether this will be a liquid market," he said.

Business trusts a priority

Some panellists believed that the potential introduction of business trusts is the most exciting aspect of the Reit draft regulations.

The fundamental structure of the real-estate market doesn't fit into a Reit, and this is going to be a challenge for the product, said Char. "It's important to begin some momentum and open trusts to other sectors," he added.

He said that an example would be allowing infrastructure products to come onboard as infrastructure assets might be slightly better in terms of yield returns. It would also be good to open up healthcare and hotel assets, as those were traditional and globally asset-light models.

"Unless these measures are taken, this might follow the path of other regulations like Indian Depositary Receipts (IDRs), differential voting shares and corporate debt, where we have not been able to exploit the full potential," he said.

See also

India Capital Markets Forum – key takeaways

Asia Capital Markets Forum highlights

India’s new Companies Act to change CSR