Why Are Developers Not Yet Willing To Form REITs?

India is yet to see real estate investment trusts (REITs). The Central government had made the regulatory framework more conducive for the formation of REITs in the past two years. Even though REITs have proven to be successful in countries like the United States and Singapore, certain regulations have prevented their formation in India.

The government had relaxed the norms on long-term capital gains tax and minimum alternate tax (MAT). The government, for example, had exempted REITs and special purpose vehicles (SPVs) from minimum alternate tax. In the Union Budget 2016, the government had exempted REITs from dividend distribution tax (DDT) under certain conditions. DDT is seen as a major barrier to the formation of REITs. REITs are profitable in many countries because dividends are not taxed twice, once in the hands of the investors, and then in the hands of the corporation.

But the Securities and Exchange Board of India (Sebi) is yet to receive any application for REITs. Why? One of the major reasons is that insurance companies and pension funds find more valuing in other financial assets which do not subject them to the same level of risk that REITs do. REITs have offered investors reasonably high yields in many developed countries. So, a weak incentive structure would be the only reason why no one is willing to create an REIT in India. It is hard to believe that the private sector will pass up such an opportunity from which it could benefit.

Real estate developers, however, claim that they are willing to form REITs if the government remove a few more bottlenecks, including exempting them from capital gains tax when they exchange securities for other assets and removing uncertainty in the policy atmosphere.

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