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The Indian Association of REITs is lobbying the Securities and Exchange Board of India (SEBI) to classify Real Estate Investment Trusts (REITs) as equities. This move could significantly impact the fledgling Indian REIT market, which currently only has four listed trusts. These trusts focus on office space and retail space. However, experts believe there's potential for expansion into sectors like hotels, data centers, and even residential properties, attracting a wider range of investors and potentially reaching a market size as large as India's GDP in the coming years, according to SEBI chairperson Madhabi Puri.
The Indian Association of REITs believes classifying REITs as equities would have several advantages. Inclusion in stock market indices could attract more passive investors, such as those following index funds. This could bring millions of dollars in new capital into the REIT market, potentially exceeding the current market capitalization of REITs, which is less than 10% of the total market capitalization of Indian real estate according to Sundareswaran, MD of Morgan Stanley.
Equity classification could lead to more trading activity, making REITs a more liquid investment option. This would be particularly beneficial considering the current lower liquidity of REITs compared to equities.
REITs currently face a 15% tax on short-term capital gains (held for less than 36 months), whereas equities enjoy a lower rate of 15% only if held for less than one year (365 days). Long-term capital gains taxes for equities held for over a year are even more favourable at 10% on profits exceeding INR 1 lakh. Aligning tax structures for REITs with equities could incentivise investment by lowering the short-term capital gains tax burden on REITs.
India's REIT market is still in its early stages, with only four currently listed trusts. However, experts believe there's significant room for expansion. The potential to invest in sectors like hotels, data centers, and even residential properties could attract further investor interest, catering to a more diverse range of investment needs beyond the current focus on office and retail space.
While classifying REITs as equities holds promise, there are challenges to consider. Regulatory changes will need to be implemented by SEBI, and ensuring investor education about this relatively new asset class will be crucial for its success.
The Indian Association of REITs push for equity classification reflects the industry's commitment to growth. If successful, this move could unlock significant investment opportunities, potentially reaching a market size comparable to India's GDP. This would solidify REITs as a valuable option for Indian investors looking to diversify their portfolios beyond traditional stocks and bonds, while offering a way to invest in the real estate sector without the hassle of directly managing properties.
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