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The budget 24-25 in a major policy shift has provided parity between listed units of REITs and listed equity shares for investors and with the holding period for long-term capital assets reduced from 36 months to 12. It gives faster liquidity. The document noted, “Investment in units of REITs & InvITs have been made more attractive in the Union Budget 2024-25, as it cut down the long-term holding period for tax considerations in these assets at par with listed equity shares. Thus, units of listed business trust will now be at par with listed equity shares at 12 months instead of earlier 36 months.”
Real estate experts are of the view that this policy change makes REITs more attractive to investors by offering quicker access to favorable tax treatment on capital gains and with lower entry and exit barriers, making investments in REITs more dynamic.“Reducing the holding period to 12 months, which has been the longstanding ask of the industry and reduction in LTCG tax rate on immovable property without indexation benefit could potentially increase the effective tax outlay. Complementary measures such as the digitization of land records will bolster transactional transparency and market confidence.,” said Gaurav Karnik, Partner and Sector Leader, RealEstate, EY – India.
REIT OR OUTRIGHT BUY
While investment in units of REITs has become lucrative with the cut down of the long-term holding period for tax considerations, the capital gain taxes on selling investments have been revised upwards to 20 per cent and 12.5 per cent for short-term and long-term capital gains (LTCG) respectively. However, the tax hike seems to be a minor deterrent as decreasing the holding period to qualify for LTCG will free up funds for investors and increase their liquidity.
On the other end, when selling a property owned for over 24 months, the adjusted cost of acquisition using the cost inflation index (CII) to lower taxable long-term capital gains has been withdrawn. The long-term capital gains tax on real estate has been reduced from 20 per cent to 12.50 per cent, but the removal of indexation benefits will make outright buying of property less attractive for certain properties.
SIGNIFICANT BOOST FOR INDIAN REITS
The financiers agree that investing directly in real estate has been made more unattractive. The removal of indexation benefit has made long-term investments in real estate less attractive and such investors are most likely to move to REITs.
According to Vimal Nadar, Senior Director & Head of Research, Colliers, "Retail investor participation in REITs will receive a boost from the parity in treatment with other listed equity classes.” Sharing his thoughts Subahoo Chordia, Head - Real Assets Strategy, Edelweiss Alternatives said, "The change definitely adds to the attractiveness of this asset class for investors looking at risk-adjusted returns and thereby should add more liquidity to it.”
Harsh Shah, CEO, IndiGrid added, “InvITs/REITs getting taxed at parity with equities will enhance their attractiveness for investors and will strengthen their position as platforms providing superior risk adjusted returns. We believe that this will also enable InvITs and REITs to become part of stock exchange indices, which will add significant liquidity and momentum.” Expressing his views, Umesh Sahay, Founder and CEO, EFC India shared, “The significant shift for REITs and InVITs, now treated as long-term after just 12 months instead of 36, opens new horizons for investors. This progressive move not only boosts market confidence but also increase investor participation.”
Over the past five years, REITs have transformed the Indian real estate landscape, attracting around 2.3 lakh investors. The four listed REITs today have over `1.4 lakh crore in assets under management and have distributed over `17,000 crores. Overall, the budget 2024-25, positive move for REITs will further enhance its attractiveness and popularity as an asset class in India.
