MNC dreams may turn to realty
Here’s a piece of good news for international players eyeing Indian real estate: the government is considering allowing foreign direct investment (FDI) up to 49% and tax benefits for real estate mutual funds that are to become a reality soon.
By Rajat Guha & Gaurav Pai, TNN |
NEW DELHI/MUMBAI: Here’s a piece of good news for international players eyeing Indian real estate: the government is considering allowing foreign direct investment (FDI) up to 49% and tax benefits for real estate mutual funds that are to become a reality soon.
Sebi is in final stages of framing guidelines for a product that will allow retail investors to enjoy the benefits of owning a slice of the booming domestic real estate market. Real estate mutual funds — internationally known as Real estate investment trusts (REITs) — are companies that buy, sell, manage and develop real estate assets.
Much like mutual funds, REITs put together the investments of many individuals and institutions and deploy the money in real estate. So, investors wanting a pie of the real estate market action can buy shares in a REIT. This would entitle them to a share of the income generated by the REIT from its property investments.
Meanwhile, the market regulator is expected to extend some of the strict disclosure and valuations proposed for real estate IPOs to real estate mutual funds as well. An official involved with the framing of guidelines told ET that the advisory committee is suggesting a period of not more than two months for declaring net asset values and the portfolio.
In line with real estate IPO norms, the projection of the value of the land may be made only on the present realisable value instead of the future projection. Officials from the Sebi legal department, a couple of HDFC Mutual Fund key officials, Institute of Chartered Accountants of India (ICAI) representatives, Amfi and a Sebi-nominated independent chartered accountant have been meeting regularly over the past few months to finalise rules about disclosures and accounting standards to be adopted.
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“We are waiting for Amfi and ICAI to give us the final suggestions about NAV calculation and disclosures,” a Sebi official said. “Once that’s done, we will announce the final guidelines for realty funds,” he said. NAVs and disclosures have been the bone of contention for the officials framing policy on such funds. It is difficult to value a property at regular intervals and, besides, the valuations would depend on the valuer. Sebi is also expected to announce which entities would be allowed to launch such a fund and the minimum investment amount for investors.
“The taxation of REITs will depend on the specific structure and type of REITs that will be allowed to operate in the country. The revenue mechanism governing the structure would soon be in place,” a senior government official said.
Internationally, REITs are a tax designation for a corporation investing in real estate that reduces corporate income taxes.
In return, REITs are required to distribute a portion of their income, which may be taxable in the hands of the investors. The REIT structure was designed in the US to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.
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