Industry insiders and experts are urging the Union Budget 2025 to introduce tax incentives and simplify the tax structure to enhance the appeal of Real Estate Investment Trusts (REITs) as a viable investment option. Suggestions include sops for green building developments and measures to drive retail and institutional participation in REITs, currently a niche asset class in India.
REITs in India: Current Landscape
India presently has four listed REITs, three of which focus on office assets backed by prominent global and Indian investors like Blackstone and Brookfield. However, despite SEBI's efforts to promote REITs, retail investor participation remains low due to modest returns.
The share price of Embassy Office Parks REIT, India's first listed REIT, has risen by 18% since its 2019 debut, lagging behind the benchmark Nifty 50 index. While institutional investors appreciate REITs for their hybrid debt-equity structure and consistent cash flows, retail investors have yet to find them appealing.
Industry Demands for Tax Reforms
Experts highlight the need for significant tax reforms to enhance the attractiveness of REITs:
- Exemption on Double Taxation of Dividends: Industry leaders, such as the Managing Director of Research at Savills India, have called for eliminating double taxation on dividend income, which could drive liquidity and retail participation.
- Capital Gains Exemptions: Experts recommend capital gains exemptions on direct asset transfers and security swaps, along with aligning withholding tax rates for foreign portfolio investors (FPIs).
- Dividend Tax Relief: Unitholders would benefit significantly from dividend tax exemptions, further popularizing REITs as a secure asset class.
- Regulatory Easing for Charitable and Religious Institutions: Allowing these entities to invest in REITs could boost liquidity, complemented by concessional long-term capital gains tax rates for listed securities held by REITs.
Emphasis on Green Buildings
The growing global focus on sustainability has made green-certified office spaces increasingly desirable among businesses. Over 67% of REIT-eligible office stock in India is already green-certified, reflecting developers' focus on ESG compliance.
Industry experts propose incentives for green building development, including tax breaks for sustainably built office spaces. This move would align with corporate ESG mandates and promote the long-term viability of REITs.
The Road Ahead
Since their inception, REITs in India have distributed over Rs 18,000 crore, reflecting their potential to generate steady cash flows. Experts believe that tax reforms and green building incentives in the upcoming Union Budget could attract more investors, stimulate foreign investments, and enhance market liquidity.
With SEBI introducing regulations for small and medium REITs, a supportive tax environment could further cement REITs as a preferred investment avenue, driving growth in India's real estate sector.
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