DLF Moves A Step Closer To Launch REITs

DLF, India's largest real estate company, has taken one step closer towards creating perhaps country's first Real Estate Investment Trusts (REITs) after it sold DLF Place Saket, an upscale mall in South Delhi, to its wholly-owned subsidiary for Rs 904.5 crore.

REITs are listed entities that invest mainly in leased office and retail assets and distribute most of their income to shareholders as dividends. It gives developers a new avenue to raise funds by allowing them to sell finished commercial buildings to investors and list them as a trust.

On March 17, DLF said the board of directors had “approved sale of ‘DLF Place Saket’, a shopping mall, having a built-up area of 5,16,000 sq ft along with land parcel... to Nambi Buildwell Pvt Ltd, a wholly-owned subsidiary of the company on an arm’s length basis”. This is in line with the strategy to structure ownership of existing assets to facilitate potential monetisation, either through REITS or otherwise in future, subject to necessary regulatory and statutory approvals, the company said in a filing to the BSE.

In October 2015, DLF had announced that its promoters would sell their 40 per cent stake in the company’s rental arm DLF Cyber City Developers Ltd (DCCDL) for an estimated over Rs 12,000 crore to institutional investors for monetizing commercial assets and remove conflict of interest. DLF owns remaining 60 per cent stake in DCCDL, which holds the bulk of its office and retail complexes. The company has rental assets of about 30 million sq ft with an annual rental income of about Rs 2,700 crore.

DLF is expecting the deal to be completed by July this year as more than 25 institutional investors have shown interest to take part in bidding process.

DLF has already said it is in process of forming a special purpose vehicle (SPV) which will be the first step towards a REIT launch. "The SPV will act as a holding company for all the commercial assets that are REIT compliant. We should be ready in the next 6 months," a company spokesperson said. DLF is preparing to launch REITs worth up Rs.6,000 crore in two tranches over the next two years. The company, which manages about 30 million square feet of commercial office space, stated that a compliance process is underway to evaluate properties.

Filip To REITs
In the Budget for 2016-17, the finance minister said that to facilitate investments in REITs, any distribution made out of income of SPV to the REITs and infrastructure investment trusts having specified shareholding will not be subjected to DDT. This move will help companies create REITS. However, experts said there are a couple of more issues that need to be addressed to see any rush for REIT listing. These are exemption REITS from capital gains tax and state governments' stamp duty while transferring assets to REIT's holding company.

Earlier this month markets regulator SEBI allowed foreign portfolio investors to invest in newly launched products - REITs, InvITs and AIFs - and also permitted them to acquire corporate bonds under default. The move is a positive development for DLF and other real estate companies which are expected to come up with REIT this year. However, the Securities and Exchange Board of India (Sebi) said that FPI will not hold more than 25 per cent stake in such AIFs.

Business trust structures of REITs and Infrastructure Investment Trusts (InvIts) are expected to help in attracting funds into the country's real estate and infrastructure segments.

REITs Hurdle
In the story titled "The REIT Way To Invest", Saurabh Chawla, senior executive director, Finance, DLF, had pointed out that 40-50 per cent of cash flows generated by the developers is currently taxed so why should anyone launch REITs in its current form.

Although market watchdog SEBI came out with guidelines for REITs in September 2014, not a single REIT offering has so far come from any player. According to Hemant Tikoo, Chairman, Experion Developers, three or four things if implemented can push REITs. “REITs should be made a pass through structure. While rental income is a pass through, capital gains on sale of assets/SPV is not a pass through. Stamp duty on transfer of shares of SPV or commercial assets from developer to REIT should be exempted,” says Tikoo whose Experion is a FDI-funded developer. He says the Dividend Distribution Tax by SPVs to REITs should also be exempted and transfer of assets in lieu of units of REITs should have tax deferral provisions.

DDT has been the biggest concern for REITs in India. Rajesh Narain Gupta, Managing Partner, SNG & Partners recently told BW Businessworld that if DDT is applied and thereafter the withholding tax is also applied as per the current norms there will not be any interest in REITs.
Before the Budget announcement, the SPV was required to pay tax on its profit which is the corporate tax. Out of the balance profit, if a dividend of another 22 per cent is to be paid, what remains is almost half of the original cash flows, Gupta had explained.

Alternatively, if the asset is first moved into a trust, then stamp duty has to be paid on asset sale which is around 7-10 per cent. On the balance, DDT gets paid. According to another expert, the road map for foreign investment in REITs also requires more clarity. “Under the extant norms, FDI is not permitted in entities carrying on real estate business. Although the Union cabinet gave its approval for foreign investments in REITs on 6 May 2015, no formal notification under the FDI policy has been issued so far”, he had said.

Commenting on the Budget announcement, real estate consultancy firm Colliers International India said that DDT was considered as one of the biggest hurdles left in making REITs financially viable for Indian commercial stakeholders. “We may see introduction of REITs in the Indian market soon,” said Colliers International India.