Developers will be able to get rid of their excess baggage

Prem Rajani, Managing Partner, and Ashish Parwani, Partner, Rajani Associates explore the avenues of REITs (Real Estate Investments Trusts) and InvITs (Infrastructure Investment Trusts) and analyse if these instruments will make for attractive investments.

With regards to the investment trusts, where do we stand in terms of legislation right now?
Rajani: We are almost there both with REIT and InvIT. They have been in the pipeline for quite some time. The government has taken the initiative to come out with proper SEBI regulations, which itself is the very first step towards REITs and InvITs. We are working on one InvIT right now. There are two-three already filed with SEBI. Nevertheless, there are still minor tail-end issues which will get clarified in due course of time.

I think that among the two-three major things that we need clarity, first is the matter of a few clarifications on taxation and exemption/reduction on stamp duty implication, on which I hope they will plug the gap.

Second is that SEBI should come up with slight modifications on listing. Right now, we have SEBI ICDR Regulations, which are for the listing of shares and other specified securities. We will need a new policy for the listing of units of InvITs. Hopefully, by the end of this financial year, the government will have the InvITs and REITs not only from the regulation point of view, but also actually with market players setting and witnessing successful working of REITs and InvITs.

And of course, there are always smaller issues. I think there will be a natural fallout with this concept vis-a-vis other rules and regulations of SEBI such as that of insider trading and such other concepts. But I am sure, the regulators will come out with separate rules for the same. In a very short span of time, we may expect a few insider trading regulations in case of trading of units of REIT/InvITs. They will allow shares to be shared with securities. Securities may be shared with units. Though I would say that units of InvITs and REITs are not exactly shares of a company, the regulators will have something coming up on trading restrictions on confidential information or related areas.

It will obviously give a fillip to developers and it will also attract investors…
Rajani: Developers will do well because they will be able to get rid of their excess baggage. They will monetise it. Today, every group is monetising. Jaiprakash and JP Group, both are monetising. They wanted to repay debts. We have a client who is dealing in the wind energy business. They have around 200 MW of wind energy. For the next 20 years, they will just keep moving. They build it, start up, farm out and start afresh. One of our other clients we know has got six road projects. They can´t manage it now. They want to hive it off to some InvIT who can take over the projects and they will take on some more projects thereafter.

When will these come into force?
Rajani: In the commercial space, there has been a shift from ownership to leasing out, especially for property around 20,000 square feet, 40,000 square feet, a million or two million square feet. You can see big companies lease space, not buy property. Very rarely will you see an MNC buy property. They take property on a lease basis. So we will see more and more of BKC-type of properties coming up and more on a rental basis so that they can monetise.

So can we say that InvITs are coming up?
Rajani: Yes, they are already coming up.
Parwani: Everything is in place, the regulations and guidelines are in place. GMR and IRB have already made a big case for InvITs.
Rajani: In the two-month window, the government came up with tremendous FDI reforms with respect to the foreign investment in units of REITs and InvITs. InvITs can also borrow now from non-residents. We are almost there. There are just around two-three gaps. If SEBI comes up with listing norms, we will be there. There are SEBI ICDR Regulations, which says how one lists shares. We are adopting the same approach but it is too broad. This will be at a different platform, but they will have to go through the same IPO process, Red Herring, et al.
Parwani: The concerned procedure is already there for InvIT and it will be finalised very soon.

Rajani: Investors have started showing interest, fund managers have started showing interest, the promoters have already tied up with investors. A lot of traction has taken place. In Bengaluru, players like Embassy and RMZ have already tied up with investors like KKR and Blackstone. We see REIT and InvIT both as a mixed bag coming up. We are talking to one company for REIT and another for InvIT. By and large, around 90 to 95 per cent of the structure for REIT and InvIT is the same.
Parwani: Hotels will also go to InvITs, though not all of them. Three-star hotels and above will go to InvITs. Power projects, infrastructure projects and certain hospitality projects will all go under InvITs.

Is that how it is in any other market elsewhere?
Parwani: Singapore is a market that is already advanced. Initially, when they started, there were only two or three. Now, there are more than 25-28. We are following the Singapore model. There are a few differences, but mostly, it is in a similar manner.

What about long-term investors?
Rajani: Long-term and HNI investors will come in. We need at least a minimum of 5-10 years. This is not the stock market that you can avail a six-month exit. It is not easy to deliver unlike with shares. It´s not like Rs.20 will become Rs.50 or so in a season. With REIT and InvIT, there is a hardcore underlying asset and rent that is present. If the rent is going down, the interest will go down. There is a valuation process that is well-defined, where you can identify the assets. There is bound to be a check and tally. The bandwidth of play is far more narrowed down. Your income is secured. It will depend a lot on the industry, say, the aviation industry or the telecom industry. Industry norms will affect REIT because you can identify the assets of the land. For instance, for REIT, there are 10-20 buildings coming up which will generate rental income. Or in the case of InvIT, if there are four or five new power projects or new roads coming up, which means income will be generated. And you will not add roads every week. So it will be far more foreseeable. The mindset here will be very different from the stock market. The minimum ticket size is `250 crore for companies and Rs.10 lakh for individuals. So you will not see 50 shares of 1 unit. It will always attract more savvy investors.

By definition, is the product not for retail investors?
Rajani: It is for niche type of investors, although a few individual investors might not take 100 units; they might take 10 units.

Which are the sectors that will benefit from InvIT?
Rajani: Aviation will really benefit from InvITs. Income is what InvIT will maximise, that is the revenue that we will be looking at.

When we say maximise, what do you mean?
Rajani: Every square foot will be utilised to the maximum and you will bring in the expertise to help you achieve this. So your revenues might not be 20 flights coming in and you taking parking charges or take-off charges. We are looking at value-added services where only experts can help in maximisation of revenue.

You are saying that there is going to be lot of scaling up of value-added services…
Rajani: In Schiphol Airport in Amsterdam, you can go there four hours before departure because there is so much to do there. Even after being there for three hours, a customer can still feel incomplete. There are so many people who spend up to six hours at the Dubai Airport because there is so much to do there. The income at Dubai Airport is not only from flights landing and taking off. People shop for perfumes, tobacco, liquor, eating, display of cars and what not. InvIT or REIT will always bring in value-added services. Developers always focus on maximising; likewise for InvIT.

What are the other sectors that we can we look at?
Rajani: Hospitals and hospitality, both will do fine. Hospitals traditionally have been built in somebody´s name or in someone´s memory. Now all of this will change; it will be more forward looking and focused on maximising revenue. I also feel telecommunications, especially towers, will see a rise. Towers can be a good and regular source of income.

There is a lot of problem, though, in the telecommunications sector… ?
Rajani: Let´s look at the positive part. All developed countries also have their own challenges though they don´t glorify them. But the larger picture is that people are understanding it, which is a good thing. My fear is the challenge of getting investments into REITs and InvITs, because of the interest rates. REITs will never offer you 10-12 per cent per annum.

Parwani: Your real-estate value vis-a-vis your rent income will not be more than 5 per cent. So how can I pay 15 per cent? This can´t be done, unless value-added services keep adding it up.

Rajani: Today also, if I buy a property and put it on rent, I will not earn more than 3 to 4 per cent per annum on it. How will I get 10-12 per cent? The problem is, if I am only going to get 9-10 per cent return and the bank is giving me 7-8 per cent interest that is tax-free via an FD, I will never switch to a risky factor. Take the example of PSU banks secured by the Government of India.

The Canadian Fund can get 1.7 per cent interest in the US Treasury Bill. After taking 4-5 per cent per annum after taking the dollar-rupee fluctuation, there is still 3 per cent. I would say there would be more of FDI investments instead of domestic investments. Domestic money may only come in from PPF that is excess money that the government wants to transfer, or LIC or GIC if they have surplus money… but HNIs putting in money, I am not too sure. Today, a government bond will offer 7 per cent tax-free return. NHA is giving 6.5-7 per cent tax-free. So why should I put money in REITs and InvITs? If I am getting 7.5 per cent tax-free, then why should I take 9 or 9.5 per cent tax-free, run by a particular fund manager and take the risk?
Parwani: Unless I am getting 10 per cent or more tax-free returns through REITs or InvITs, only then does it make sense. Bonds like NHA, PFC or Railway Bonds, all are tax-free. However, one-time tax may be applicable on these investments.

But we have been seeing in the media all these stories about long-term investors, say, Canada, Singapore, Europe, Dubai or Qatar. Are they planning to come?
Rajani: They will all come. They are only getting 0.75 per cent, or 1 and 1.25 per cent. Europe is offering negative interests like Switzerland is offering -0.5 per cent. Japan is also negative. So if you put your money there, you have to pay. You will find all those funds coming from overseas at 4 per cent or 4.5 per cent or 5 per cent p.a. If they get 8 per cent, they will be jumping with joy. So I see a lot of FDI. That is why the government has been very smart by allowing FDI in retail REITs and InvITs. Had it been left to our own Indian market, it would have not even started. But that is my view.

Parwani: Foreigners can invest through Schedule I. NRIs can invest and foreigners can invest under whatever schedule they fall under. So any foreign fund which has a 5-10 year horizon and puts its money in InvIT or REIT, it will get 4 to 7 per cent per annum and can sleep on it.

Ashish: It is market valuation appreciation on underlying assets, that is where the cash will come in and that is the sweet point to it. Say a hotel property, the valuation of which goes up after four or five years, you will get appreciation of that also.
Rajani: That´s where the sweetener lies, you can sell the hotel after 15 years.

But then again even players who say they are in for the long haul (say for 25 years) are not investing in infrastructure. They have come and parked funds in top blue-chip investments. They are exercising a lot of caution…
Parwani: There are ready-made projects that are already functioning, that have already been commissioned. They will be investing in that only.

Of course they are not greenfield, but the quality of these investments is…
Rajani: At every level, there is a player and there will be one investor. There will be a difference in your guaranteed return cost, though the law doesn´t permit guaranteed returns. I see that there will be enough of space for everyone. Of course, it will be an important part that the government will focus on pedigree.

So you see enough and more investments coming in for every kind of asset?
Rajani: Always. There is always a market for everyone.
Parwani: We Indians are very optimistic.
Rajani: Yes, and I am very optimistic. This country has its own challenges, but somewhere, we will be able to manage the challenges. I think at every level, there will be investors. At a higher level, we will see more of vulture funds. We will see more people with more risk appetite coming. We will have various players coming in. But they will get funded.

It is also good for people who are looking out for funds because they can get an exità Rajani: They can exit, they can also monetise.
They can keep a small equity, they can invest in another project. There are so many people in the infrastructure sector who are stuck. They would want to do more. They can sell a part of their assets and start another project. So it will be build, operate and eventually transfer because so many, by nature, are manufacturers. So, all in all we will see that InvITs will benefit investors 10-15 years down the line. The income will be steady but the value of the unit will go up by 10-50 per cent towards the end.

– Rouhan Sharma