The decision of the government to introduce Real Estate Investment Trust in India is a clear signal given by the government. The intention is clear for its commitment towards the development of the property and infrastructure sector. The announcement has raised the enthusiasm of the developers and investors.
REITs are modeled in the line of a mutual fund but are more like companies. The REITs would invest in and own revenue generating properties and also manage the mortgage and mortgage-backed securities for revenue generation.
The smaller investors will be able to invest in properties indirectly and reap the benefits of revenue generating properties. The investors will own shares of the trust. The shares of the REITs can be traded like shares at either discount or premium value depending upon the future market value of the trust. REITs will be listed on the stock exchange.
REIT is successful in the west and many developing nations, it is expected the same to happen in India. Indian real estate market is highly unorganized and lacks transparency. Given the current market scenario, the real valuation of this market is impossible to arrive at.
Many high-value transactions are done either off the record or the properties are shown to be undervalued. REIT will be a platform which will serve to bring in more transparency to the market. It will also help in bringing in more liquidity and risk mitigation for the investors.
In order to give a push to this sector, REIT will be given a pass-through status for which it will have to fulfill the criteria as set by the policy regulator. The distribution of the profit by the company to its shareholders must be at least 90 percent of the taxable income.
The trust will not have to pay any tax, rather the obligation will pass onto the investors but they cannot pass tax losses. Eighty percent of the funds must be invested in revenue-generating assets. REITs can purchase or develop a property but cannot a sale with the intention of making a profit.
Investment in REIT will not provide any tax benefit to the investors but the dividend issue will incur dividend distribution tax.