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REITS open up new avenues for real estate investors

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REAL ESTATE INVESTORS

Challenges similar to mutual fund industry can be expected, say experts

The formation of Real Estate Investment Trusts (REITs) will help in expansion of the quality real estate in India, besides giving developers another instrument to execute their projects. REIT is going to become a reality next 12 months after recent decision of market regulator SEBI.

These listings will provide retail investors a good and an entirely new opportunity to participate in real estate’s growth story in India. This instrument has the potential to attract institutional and retail investors alike because of its inherent nature to provide regular dividends at relatively low-risk levels as compared to other investment schemes in place.

“Since such projects are often office buildings or shopping malls, they have already been developed and have tenants, so their income stream is relatively easy to predict. As the value of these projects increases, REITs will hold them for a long term and not trade in and out of real estate. As for the yields, the rental yield in commercial asset class across the country is usually in the range of 8-11%,” said Anuj Puri, Chairman and Country Head JLL India.

It will be beneficial for people investing in REITs because the preferred investment will be in commercial developments, specifically in highest quality or high end office spaces like tech parks, due to the high rents in this asset class. To curb risk currently only 20% of the REIT amount can be invested in constructing new projects or development. The remaining 80% of the fund’s assets must be invested in income-producing property, which will endure higher returns for retail investors just like one gets from investing in mutual-funds currently. The trust will be of major benefit for the city because the commercial real estate sector is picking up and has huge potential for growth.

A recently published report by Colliers International has put Bengaluru at number one position when it comes to commercial leasing in the country. Bengaluru remained on a high growth trajectory and maintained its leading status among the key cities by retaining a 31% share followed by Delhi-NCR, which represented 18% of the total occupier demand.

“If the capital value appreciation for residential property is not taken into account and only the rental yields of both residential and commercial asset classes are compared, yields in the former stand much lower at 2-4%. In commercial developments, yields combined with capital value appreciation over the recent years have been better off than residential properties,” said Anuj Puri.

Retail investors are nonetheless excited at the new and easier real estate investment opportunity that REITs would open up for them.

Clarity on how big or small the ticket sizes turn out to be for them would emerge only after the first two or three REITs have been listed.

The REIT potential in India is huge. Currently, around 229 million sq. ft of office space is REIT-compliant. Even if 50% of this space were to get listed in the next few years, we are looking at a total REIT listing worth $18.5 billion. As India’s of commercial assets grow, it presents great opportunities for REITs.

HOW WILL IT HELP THE COMMON MAN?

l Retail investors have good and an entirely new opportunity to participate in real estate’s growth story in India.

l It has an inherent nature to provide regular dividends at relatively low-risk levels as compared to other investment schemes in place.

l This curbs risk to only 20% of the REIT amount can be invested in constructing new projects or development.

l As India’s stock of commercial assets grows, it presents great opportunities for REITs – and for their potential retail investors

Regulations

373 Maharashtra Cities To Fall Under PMAY Scheme

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The state of Maharashtra has added 232 cities to the existing 142 which makes it 373 cities under the Pradhan Mantri Awas Yojana Scheme (PMAY).

The officials at the housing department feel that this step will aid the government take up more projects under the PMAY scheme.

Sachin Kulkarni, Builder shared his concerns over the lack of coordination between the department in executing PMAY projects. He said, “This is a good sign. However, the PMO’s seriousness in promoting HFA is diluted by the time it reaches the authorities. Apart from collecting application from interested beneficiaries, nothing has moved on the ground in urban centres. I hope that this initiative moves on fast track”.

Maharashtra CM Devendra Fadnavis recently states that the in order to create more housing stock the state’s Slum Rehabilitation Authority scheme be brought under PMAY so that it can receive the subsidy to create more affordable housing. He clearly mentioned that the government intends to create more housing stock and it was taking various initiatives and making policy changes for it.

Also Read- Affordable Housing To Get A Boost With PMAY’s Scope To Be Extended To Private Lands

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Regulations

Real Estate Sector May Fall Under GST What Does It Mean For Buyers?

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One after the other the real estate sector has witnessed massive policy and law changes in its systems. Nonetheless, the tide has not passed yet. The GST council will take up a proposal to bring it under the uniform nationwide levy.

As the industry is still recovering from the RERA Act, the finance minister, Arun Jaitley said that there is a strong case to include real estate in the new indirect tax regime. He said this last week and also mentioned that GST Council will discuss it in November.

At present, the home buyers are paying 12 percent GST on under-construction properties. This percentage includes two taxes which are stamp duty and registration. The rate of which varies in each state but GST will make them uniform.

Santosh Dalvi, KPMG India partner (indirect tax) said, “If the entire real estate is brought under GST, they would have to abolish the stamp duty and we don’t know how the government plans to compensate the states for their loss.”

The stamp duty with registration and GST comes to approximately 18 percent for under construction properties. He further said, “So, it’s important to look at what rate it will be taxed at. We can then look at consumer prices”.

While agreeing, Bipin Sapra, EY partner (indirect tax), added, “It’s going to be a test for the government”.

Developers also pay taxes on raw materials. However, unlike other businesses, they don’t get any tax refunds through input credit. GST taxes every stage of the business activity to better compliance and compensates for it by permitting refunds.

Anuj Puri, Anarock Property Consultants chairman, said “By including real estate under GST, builders can get a fair amount of input credit, helping bring down costs,” He added that it would make homes cheaper for buyers.

According to Sapra, it will depend on the tax rate applicable.

Niranjan Hiranandani, co-founder of Hiranandani Group said, “Real estate under GST ambit means consumers will only have to pay one final tax.” He stated that with the commencement of RERA it brings transparency and GST would reduce the burden in terms of taxes payable while buying the home. He concluded, “Not only will this create positive sentiment but it should also boost actual sales”.

Also Read: Affordable Housing Is The Changing Face Of Indian Real Estate

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Regulations

Home Buyers Will Be Covered Against Builders Who Are Going Bankrupt

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In a move to protect home buyers from builders declaring their bankruptcy, the Insolvency & Bankruptcy Board of India (IBBI) has amended rules which make it necessary for any company to showcase how they have dealt with interests of all stakeholders. This is directed towards companies like Jaypee Infratech and some of the entities of Amrapali Group.

The regulator has informed about the revised rules last week. This will ensure that banks and other creditors do not get away by protecting their interests at the expense of others who are impacted by the action.  Banks are part of the creditors’ committee. They become an important decision-making body after a company is admitted for bankruptcy.

An expert bankruptcy lawyer said, “The change in the rules has plugged a gap as flat buyers are of the view that there is nothing to protect their interests.”

According to the new law that was enacted last year intends to speed up the resolution process in a period of 180 days, with a possible extension of 90 days. This will be done by appointing insolvency resolution professionals who will take charge of the company’s operations and prepare a plan. As per the law, an information memorandum will be finalized if the creditor’s committee is willing to take applications from other interested companies to take over the company.

The insolvency experts say that the law providing for the plan binds corporate debtor (the company) and its members, employees, guarantors, and creditors, other stakeholders involved in the resolution plan. However, there are no obligations mentioned in the rule to give any treatment to the stakeholders other than the financial creditors (banks) and operational creditors, which includes vendors and others who may have dues.

The National Company Law Tribunal, based on the comfort provided by the revised rules, will choose the final resolution plan based on bids that are received. The lawyer further said, “The tribunal will not clear the resolution plan without giving notice to all stakeholders and the flat buyers can raise objections at that point of time.”

Also Read: Tanvi Group Fail To Deliver Homes And Declare Bankruptcy

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