MUMBAI | BENGALURU | NEW DELHI: Realty developers including DLF, K Raheja Corp and Embassy Properties that have commercial property that can be listed as real estate investment trusts (REITs), have started consolidating their office assets. However, the possibility of the first REIT hitting the market is still sometime away as issues such as state-level stamp duty and creating optimal structures to group assets into trusts may take time. State-level stamp duty needs to be paid by the companies while transferring their properties to a holding company that would act as a REIT sponsor. “More than capital gains tax, the mechanism and the process to structure your vehicle to make it tax efficient for the sponsor and investor is an important aspect,” said Shashank Jain, partner, transaction services, PwC. “Apart from this, what is critical is the current return-expectation mismatch, which, hopefully, will soon go away and there would be a convergence on commercial expectations by all stakeholders.” Finance Minister Arun ?Jaitley removed dividend distribution tax (DDT) on REITs in his February 29 Budget, a move that’s expected to speed up the formation of such entities. While a major hurdle in the form of DDT has been cleared, experts and developers have been voicing their concerns over pending issues. “There are still some tax issues while doing a REIT in India, abolishing of DDT alone is not sufficient for companies to launch REITs in the coming months as there is a bigger hurdle in the form of capital gains (while transferring the asset),” said Jitu Virwani, CMD of Embassy Properties. “It is better to opt for commercial IPO (initial public offering) than going for REIT listing.” Although introduction of REITs has been under discussion for several years, none have yet been formed given the lack of clarity on taxation. REITs own properties and their rental income is distributed among investors. Under current rules, DDT on such payouts is 15%. Developers have already started work on consolidating commercial projects. The exercise is aimed at having better focus and control if any monetisation is undertaken later on. “In order to grow our commercial vertical further and have better focus on these projects, we are working towards creating a separate commercial development entity,” said Vinod Rohira, managing director, K Raheja Corp. “We will hold all our existing and planned office assets under one umbrella. From DDT perspective, decks have been cleared, but other factors like stamp duty need attention to make REITs a possibility.” K Raheja Corp’s commercial assets portfolio is spread over 20 million sq ft across Mumbai, Navi Mumbai, Pune, Hyderabad and Bengaluru. “We are in no rush to hurry into a REIT listing,” Rohira said. With developers owning assets across various states, streamlining stamp duty and having a policy acceptable to all states is necessary to prevent tax disputes cropping up. “Given that stamp duty is a state subject and most of these companies own assets across various states, the scenario can get complicated (administratively),” said Rajeev Bairathi, executive director at Knight Frank India. “Companies will have to pay stamp duty to various states wherever they own assets. Government will have to come up with some policy that will be acceptable to the state governments.” Concern over the possible public response is also expected to hold REITs back. “Today, there is larger interest in the private market compared to capital markets given the volatility in the capital markets worldwide,” said DLF’s senior executive director, finance, Saurabh Chawla. “In such conditions, no investor will put in money into an instrument like REITs at this stage. Once the volatility goes away, there is significant amount of capital targeted for this asset class.” He expects the first REITs to be set up in about 9-12 months, given the various issues that need to be resolved. These include Securities and Exchange Board of India (SEBI) regulations, preparations that companies need to make and volatility in the capital markets. “We are going with step one right now in which DLF’s promoters are selling their 40% stake in DLF Cyber City Developers Ltd (DCCDL),” he said. “Once this is done, the SPV (special purpose vehicle) will be created and the joint owners will then take a call on the multiple REITs that we need to create.”