l Equity Research l India l Real Estate Investment & Services l

19 August 2014

India real estate and infrastructure

REITs and INVITs Future looks bright
The Indian governments nod for REITs/INVITs is a positive step. We analyse their viability, potential structures and
benefits. We have met infrastructure/property developers and industry consultants to understand their views.
Our discussions suggest that: (1) asset owners expect REIT yields of 8-9% for listing; (2) potential listings may still
take six months at least; (3) interest-income pass-through from an SPV to REIT is an option to lower tax leakage.
Our analysis suggests that REITs are financially feasible for sponsors, if REIT yields are 200bps lower than the cost
of debt for operational assets. Based on the prevailing cost of debt, this leads to a range of 9-8.4% REIT yield, which
is in line with corporate expectations. The current tax structures are more lucrative for overseas investors.
REITs/INVITs could potentially bring in USD 2-5bn of long-term, low-cost capital to India. They provide four key
benefits: lower cost of capital, improved liquidity, better transparency and higher business efficiency. The US and
Singapore markets highlight the success of REIT structures. Further tax enhancements could lead the way in India.
DLF (DLF IN, PT INR 260, OP) is the best play on REITs, in our view. Phoenix (PHNX IN, PT INR 350, OP), Prestige
(PEPL IN PT INR 280, OP) and asset owners in roads and ports sectors could also be potential REIT plays.

The Trusted route

Growth of REITs in the US

Total REIT Value

800

# of REITs (RHS)

200

600
USD bn

250

150
400
100
200

No of REITs

50

0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013

Source: REITWATCH

Singapore REIT DPU yield

15

Average Singapore REIT yield

SG 10-yr Govt Bond
Spread

10
%

The SEBIs approval for real-estate/infrastructure investment

trusts (REITs/INVITs) and the tax norms issued by the finance
ministry (still awaiting further clarity) should boost these
sectors, in our view. Our interactions suggest that asset
owners (sponsors) have started to investigate these options,
and are positively inclined towards listing at sub-9% yields.
However, given the need for further tax clarity and lack of
familiarity with REITs, potential listings are still at least six
months away (norms are effective October 2014). Sponsors
are working on tax efficiencies, but tax pass-through on
interest income from SPVs to REITs should offer a good
incentive to reduce tax leakage. Our analysis suggests that
REITs are financially feasible for sponsors, if REIT yields are
200bps lower than the cost of debt for operational assets.
Based on the prevailing cost of debt, this leads to a range of 98.4% REIT yield (our detailed analysis on the REIT structures
and tax implications are in inside pages).

The bottom line

REITs/INVITs could bring USD 2-5bn of long-term, low-cost
capital to India. They will benefit the sectors by reducing
capital costs and qualitatively improving liquidity, transparency
and efficiency. Companies with large annuity portfolios, such
as DLF, Prestige and Phoenix, and asset owners across roads
and ports sectors could benefit from these. DLF valuation
could increase by 3% on direct impact and 12% due to indirect
impact on implementation of REITs. REITs have been highly
successful in the US, Singapore and other developed markets.

Gaurav Pathak

Shashikiran Rao

+91 22 4205 5921

Equity Research
Standard Chartered Securities (India) Ltd

+91 22 4205 5920

Equity Research
Standard Chartered Securities (India) Ltd

0
Jul-02

Apr-04

Dec-05

Sep-07

Jun-09

Feb-11

Nov-12

Aug-14

Source: Bloomberg, Standard Chartered Research

Did you know Over the past 40 years, the US

equity REITs have given a 12.6% return. They have
outperformed the S&P 500 over 10-40 years.

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2014

http://research.standardchartered.com

Equity Research l India real estate and infrastructure

REITs/INVITs viable at sub-9% yield

The cost of debt for leased properties or operational infrastructure projects is in the
range of 10.5-11%. DLFs commercial mortgage-backed security (CMBS) yields are
in the range of 10.5-11%. For under-construction projects, the cost of debt is higher
and is dependent on the execution risk; currently, it is in the range of 11-13%.
Sponsors could look at REIT/INVIT proceeds to liquidate debt or create equity capital
for growth projects.
We have included our assumptions for a leased commercial property in the table
below. We have also detailed the current tax treatment applicable for REITs. We
analyse that for the REIT to become viable for a sponsor, the REIT yield needs to be
200bps lower than the cost of debt for a similar asset. This is also in line with our
discussion on industrys expectations on REIT yields.
Figure 1: DPU yield spread analysis
Assumptions
Rental escalation (YoY, %)
Terminal growth (YoY, %)
Cost of debt

3.0%
1.0%
10.0%

Debt as a % of gross rental

400.0%

Debt repayment from

5th year

Comparable commercial mortgage-backed securities (CMBS) or infrastructure debt rate

We assume no debt repayments for the first four years

Fee payments to REIT

10.0%

Fee as a percentage of PBT, in line with the international norms

Tax rate

34.0%

We assume a full corporate tax rate

Dividend Distribution tax

20.5%

% of REIT income through interest from SPV

50.0%

Withholding Tax rate

7.5%

Cost of Equity

14.0%

Dilution from REIT

50.0%

Depreciation

Average withholding tax for interest payable to domestic and foreign investors
Minimum 25% dilution

8.0%

Standard Deduction

30.0%

% of properties availing standard Deduction

25.0%

Tax rate for Unitholder in interest income

30.0%

Capital gains tax without indexation

10.0%

Property rental yield at cost

20.0%

Applicable to commercial properties, similar operating costs for infrastructure assets

Tax rate for income payable for the domestic investors
Top line as a percentage of gross block

Yield for REIT

8.42%

Spread to debt

-1.58%

Cost of Debt

10.00%

10.25%

10.50%

10.75%

11.00%

8.42%

8.45%

8.49%

8.53%

8.55%

158

180

201

222

245

Yield for REIT

Spread bps
Average Yield

8.5%

REIT IRR

9.6%

Average spread (bps)

201

Source: Standard Chartered Research estimates

19 August 2014

Equity Research l India real estate and infrastructure

However, spreads over government bond yields are low

We believe that REIT investors in India may not be able to get a significant spread
over the yield on the 10-year government bond, unlike in the developed markets. In
the Singapore market, REITs have traded at an average spread of 360bps DPU yield
over the 10-year bond yield. In India, we expect the spread over the Indian 10-year
body yield (currently 8.6%) to be lower.
However, we believe overseas investors will be able to get better return than
domestic investors, due to lower withholding tax and lower income tax on the interest
income. Also, an increase in DPU, long-term capital appreciation on rental assets
and potential reduction in the rate cycle could help cushion the lower spread, in our
view.
Figure 2: Singapore REITs DPU yield
14
12

Market weighted average Singapore REITS DPU yield

SG 10-yr Govt Bond
Spread

10

8
6
4
2
0
Jul-02

Apr-04

Dec-05

Sep-07

Jun-09

Feb-11

Nov-12

Aug-14

Source: Bloomberg, Standard Chartered Research

Investment ideas
We believe DLF could be the best REIT play in India. Currently, 38% of DLFs value
(PT INR 260) is attributable to annuity portfolio. REITs will have a direct impact of
reducing cap rate, which we assume to be 10% to below 9% potentially adding 3%
to our fair value. However, it will also have a significant indirect impact, by lowering
cost of debt, replacing high-cost debt and bringing down cost of equity a 100bps
reduction in WACC (our assumption: 13.35%) could increase our valuation by 12%.
Other developers with large annuity portfolio Prestige (PT 280, 33% value from
annuity portfolio) and Phoenix Mill (PT IN350, 75% value from annuity portfolio)
would also benefit from REITs. We have assumed a 10% cap rate for valuing annuity
portfolios.
We believe infrastructure companies with operational assets across roads, ports and
other assets could also benefit from INVITs.

19 August 2014

Equity Research l India real estate and infrastructure

REITs A successful model globally

REITs has been a successful model globally. They were first introduced in the US in
1962; later, they were adopted by Australia in 1971. In the past decade, many
countries, including Singapore (2002), Hong Kong (2003), the UK (2006) and
Germany (2007), adopted REITs.
REITS are a massive investment vehicle: In the US, currently there are 172 REITs,
with 136 being equity REITs with a market cap USD 630bn. They own c.USD1.7tn of
commercial real estate assets, including listed and non-listed REITs, and currently
offer a 3.5% dividend yield. In Singapore, 35 REITs and property business trusts are
listed with a total market cap of SGD 56.4bn and total assets of SGD 88.8bn.
REITS offer good returns over the long run: In the US, over the past 10-40 years,
equity REITs have outperformed the Dow Jones and NASDAQ indices. Over the past
40 years, US Equity REITs have given a 12.6% return per annum.
Figure 3: Growth of REITs in the US
Total REIT Value

800

# of REITs (RHS)

250

700
200

600

USD bn

150

400
100

300
200

No of REITs

500

50

100
2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

Source: REITWATCH

Figure 4: Returns of US REITs

Returns

All
REITs

All
Equity REITs

S&P
500

Russell
2000

NASDAQ
Composite1

Dow Jones Industrial

Avgerage1

2013: YTD

5.4

5.8

13.8

15.9

12.7

13.8

1-Year

9.7

10.2

20.6

24.2

17.9

17.9

3-Year

18.0

18.5

18.5

18.7

17.3

15.1

5-Year

7.9

7.7

7.0

8.8

8.2

5.6

10-Year

10.0

11.0

7.3

9.5

7.7

5.2

15-Year

9.0

9.7

4.2

6.6

4.0

3.5

20-Year

10.1

10.5

8.7

8.9

8.2

7.5

25-Year

9.5

10.7

9.8

9.3

9.0

8.1

30-Year

9.4

11.3

10.5

8.8

8.2

8.7

35-Year

11.2

13.0

11.6

10.0

8.6

40-Year

10.1

12.6

10.4

9.2

7.3

9.7

12.1

10.2

8.4

7.0

1972 - 2013
Source: REITWATCH

19 August 2014

Equity Research l India real estate and infrastructure

REIT/INVIT structures
REIT/INVIT units are similar to mutual funds and Exchange Traded Funds, and are
listed on the stock exchanges. They are investment vehicles that own rent-yielding
real estate assets across commercial, office, retail and hospitality segments. REITs
issue units of their investment schemes through public offer and list them on the
stock exchanges.
Portfolio Diversification. REITs/INVITs typically own multi-property/asset portfolios
with diversified tenant/revenue pools, thus reducing the risks of reliance on a single
asset in the case of directly owning a real estate or infrastructure asset.
REIT/INVIT sponsor/manager. The SEBI guidelines specify that the sponsor has to
maintain a 25% stake in the trust for three years and 15% until the end of the trust. In
addition to this, another subsidiary/associate of the sponsor also acts as the REIT/
INVIT manager (effectively playing the role of an asset manager) and secures a
management fee for the same.
REIT/INVIT trustee. The trustee is responsible under the Trust Deed for the safe
custody of the assets of REIT/INVIT for the benefit of unitholders as a whole, and
oversees the activities of the REIT/INVIT manager to comply with the Trust Deed and
regulatory requirements. The SEBI has mandated an independent trustee to be
selected among the SEBI registed debenture trustees that is not an associate of the
sponsor. Hence, the trustee is mandated to be independent.
Income Distribution. REITs/INVITs normally have regular cash flow. In most cases,
most of the revenue is derived from rental payments under contractually binding
lease agreements with specific tenure. SEBI has mandated that 90% of the
distributable income should be paid as dividend.
Figure 5: India REIT/INVIT asset structure

Unitholders
Management
services

Manager

Unit
ownership

Distribution

Acts on behalf
of the trust
holders

Real Estate/
Infrastructure
Investment Trust

Management fees

Trustee
fees

Units in lieu
of asset
ownership

Asset 1

Trustee

Dividend/ interest income

Asset 2

Asset 3

Source: Standard Chartered Research

19 August 2014

Equity Research l India real estate and infrastructure

Current REIT regulations in India

The SEBI has issued a common set of guidelines for REITs and INVITs that are
largely similar in terms of structuring and provisions. The table below summarises the
various aspects of REITs/INVITs:
Figure 6: REITs SEBI norms
REITs

INVITs

Comments

Holding structure

Directly or through an SPV (not less than Directly or through an SPV (Only through Adequate flexibility for the holding
50% in an SPV and not less than 80% in a SPV for a PPP project). Further it will
structure, especially vis--vis the draft
a directly held asset)
hold a minimum of 50% and controlling
interest in an SPV. If not allowed by
concession agreements, then the trust
has to acquire voting and veto rights to
protect trust interest

Sponsors

Not more than 3

Not more than 3

Minimum Asset size/

offering size

INR 5bn/ INR 2.5bn

INR 5bn/ INR 2.5bn

Cumulative sponsor
holding in the trust

25% for the first three years of the life of 25% for first three years of the life of the
the trust, and 15% thereafter till the end trust, 15% thereafter till the end of the
of the trust
trust. However, where the sponsor has a
legal requirement as per concession
agreements to hold equity stake in the
SPVs, then combined value of the SPV
stake and trust holdings will be
considered for meeting this requirement

This is a problem area for the

infrastructure projects as it limits the
extent to which the project debt can be
replaced with proceeds from listing.

Minimum float

25%

This provision combined with a minimum

offer size of INR 2.5bn will provide
adequate liquidity for the market

Investments

Not less than 80% of asset value in

Defines two different types of INVITs
completed/revenue-generating properties (a) INVITs with minimum 80% of assets
(at least two projects, no single project
in operational assets and not more
with more than 60% of the asset value)
than 10% for under-construction
Remaining maximum of 20% can be
assets, these can offer units to public
invested in under- development
and have a lower lot and subscription
properties, mortgage-backed securities
size
(CMBS), debt or equity of real estate
(b) INVITs with more than 10% for under
companies, cash equivalents
construction assets, these can offer
units only to institutions and have a
Of the above 20%, not more than 10% in
higher lot and subscription size.
under development properties
They will not be listed on exchanges.
Even then the projects to be included
should be 50%completed in physical
and cost terms and have all the
approvals in place

These norms are well structured to

protect investors against inordinate
project delays which may shake the
confidence in the instruments. However
norms may need some clarification on
brownfield expansion of existing projects

Distribution

Not less than 90% of the distributable

cash flow atleast on a half yearly basis

Not less than 90% of the distributable

cash flow atleast on a half yearly basis

In-line with international norms, but

making it a statutory provision will boost
investor confidence

Trustee manager

SEBI-approved debenture manager, not

an associate of the sponsor

SEBI-approved debenture manager, not

an associate of the sponsor

Positive, as it helps transparency and

independence of management

25%

This has been reduced from INR 10bn in

the draft; this is positive, as it allows
smaller real estate assets to be included
in the REITs. Not so important for INVITs.

Source: SEBI, Standard Chartered Research

19 August 2014

Equity Research l India real estate and infrastructure

Tax treatment requires further clarity

The finance ministry has specified the tax implications for REITs and INVITs in the
Union Budget. The tax provisions still have issues to be resolved and may impede
potential REIT/INVIT listings, in our view. The relevant tax provisions are summarised
in the table below.
Figure 7: India REITs/ INVITs- tax implications
Transaction

Applicable tax

Applicability

Asset transfer

Capital gains tax

According to the Finance Bill, a sponsor can transfer

Valuation at which the asset transfer can happen is
assets (as SPV equity or economic interest in asset) in important, as it becomes the carrying cost of the units
lieu of units in the trust. No capital gains tax are levied on sponsor books
upon such transfer

Pending concerns/ comments

Unit sales by the

sponsor

Capital gains tax

Capital gains tax is applicable to the sponsor, which

gets the indexation benefit on the carrying cost of the
units

Capital gains tax is applicable to the sponsor,

whichgets the indexation benefit on the carrying cost
of the units

Asset transfer to trust Stamp duty

If a property asset is to be transferred, stamp duty may Stamp duty is a state subject, and a uniform
become applicable. Not applicable for SPV transfer
exemption is not likely

Rental Income

Corporate tax of 34% is applicable on the rental income Corporate tax of 34% is applicable on the rental
income at the SPV and the assets held directly by the
at the SPV and the assets held directly by the Trust.
Trust.

Corporate tax

Dividends from asset/ Dividend

SPV to the trust
distribution tax

DDT is to be paid when SPV pays dividend to the trust. DDT is to be paid when SPV pays dividend to the
Trust will not pay any tax on this dividend income or any trust. Trust will not pay any tax on this dividend income
or any DDT for distributing this income to the
DDT for distributing this income to the unitholders
unitholders

Interest paid by SPVs/ Withholding tax.

assets to Trust

A trust can invest in the SPVs through equity or through A trust can invest in the SPVs through equity or
debt (by subscribing to bonds issued by SPV). For the through debt (by subscribing to bonds issued by SPV).
interest paid by the SPVs to the trust there is no
For the interest paid by the SPVs to the trust there is
withholding tax. But when the trust distributes this
no withholding tax. But when the trust distributes this
income to the unit holders then they have to pay a
income to the unit holders then they have to pay a
withholding tax (5% for non-resident unit-holders and withholding tax (5% for non-resident unit-holders and
10% for resident unit-holders).
10% for resident unit-holders).

Asset disposal by trust Capital gains tax

For any disposal of assets by the trust (sale of SPVs),

capital gains tax will be applied, but it is tax free when
distributed to unit holders. This is helpful as it avoids
double taxation of capital gains

Interests on ECB
Withholding tax.
borrowings by the trust

Interests on ECB borrowings by the trust get the benefit Interests on ECB borrowings by the trust get the
of a concessional withholding tax of 5%
benefit of a concessional withholding tax of 5%

For any disposal of assets by the trust (sale of SPVs),

capital gains tax will be applied, but it is tax free when
distributed to unit holders. This is helpful as it avoids
double taxation of capital gains

Source: Finance Bill, Standard Chartered Research

Singapore offers a complete tax pass-through

REIT listing in Singapore has been an alternative for Indian corporates. However,
those REITs have to pay corporate tax in India.
REITs listed in Singapore have minimal tax leakage. This benefits sponsors and
investors, improving viability of the REIT structure. In our view, the eventual Indian
tax guidelines would need to compare favourably with the Singapore guidelines for
the REIT/ INVIT market in India to take-off .
No capital gains tax on REITs on sales/purchase of assets.
No capital gains tax for unitholders on selling REIT units.
No withholding tax on interest income earned by REITs for Singapore-based
investors and 10% for non-residents.
REITs do not pay any corporate tax or dividend distribution tax.
Dividends received by retails unitholders are not subject to any tax.
Corporates pay a 17% corporate tax on dividends received.
Institutional unitholders pay a 10% if non-resident and 0% if they are Singaporebased funds.
REITs should pay 90% or more of their distributable income every year.
19 August 2014

Equity Research l India real estate and infrastructure

Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.
SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year for the following
companies: DLF Limited.

Recommendation and price target history for DLF

INR
290.00

256.44

5
4

222.88
189.32

155.76
122.20
Sep-11
Date
1 9 Feb 12

Dec-11

Mar-12

Recommendation

Jun-12

Sep-12

Price target

OUTPERFORM

283.00

Dec-12

Date

Mar-13

Jun-13

Recommendation

3 19 Mar 13 OUTPERFORM

2 14 Aug 12 OUTPERFORM
286.00 4 23 Jan 14
Source: FactSet prices, SCB recommendations and price targets

Sep-13

Price target

OUTPERFORM

Dec-13
Date

Mar-14

Jun-14

Recommendation

Sep-14
Price target

290.00

5 20 Mar 14 OUTPERFORM

257.00

238.00

6 16 May 14 OUTPERFORM

260.00

Recommendation and price target history for Phoenix Mills

INR

332.07

287.19

242.31

197.43
152.55
Sep-11
Date

Dec-11

Mar-12

Recommendation

Jun-12

Sep-12

Price target

1 27 Sep 12 OUTPERFORM

237.00

Date
3 25 Apr 13

Dec-12

Mar-13

Recommendation

Jun-13

Sep-13

Price target

OUTPERFORM

317.00

Dec-13
Date

4 6 Jun 14

Mar-14

Jun-14

Recommendation

Sep-14
Price target

OUTPERFORM

350.00

2 16 Jan 13 IN-LINE
250.00
Source: FactSet prices, SCB recommendations and price targets

Recommendation and price target history for Prestige Estates Projects

INR
280.00

235.98

191.96

147.94

103.92
59.90
Sep-11
Date
1 4 Nov 11

Dec-11

Recommendation
OUTPERFORM

Mar-12

Jun-12
Price target
146.00

Sep-12
Date
3 1 Aug 12

2 21 Mar 12 OUTPERFORM
175.00 4 7 Jan 13
Source: FactSet prices, SCB recommendations and price targets

19 August 2014

Dec-12

Mar-13

Recommendation

Jun-13

Sep-13

Price target

Dec-13
Date

Mar-14

Recommendation

Jun-14

Sep-14
Price target

OUTPERFORM

180.00

5 17 Jun 13

OUTPERFORM

212.00

IN-LINE

197.00

6 6 Jun 14

OUTPERFORM

280.00

Equity Research l India real estate and infrastructure

Recommendation Distribution and Investment Banking Relationships

% of covered companies
currently assigned this rating

% of companies assigned this rating with which SCB has provided

investment banking services over the past 12 months

OUTPERFORM

55.8%

10.4%

IN-LINE

33.0%

10.1%

UNDERPERFORM
As of 30 June 2014

11.2%

8.1%

Research Recommendation
Terminology
OUTPERFORM (OP)
IN-LINE (IL)
UNDERPERFORM (UP)

Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months

SCB uses an investment horizon of 12 months for its price targets.

Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent to
scer@sc.com.
Global Disclaimer: Standard Chartered Bank and/or its affiliates ("SCB) makes no representation or warranty of any kind, express, implied or statutory regarding
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constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it
constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in an y illustration.
The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price.
While reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The
contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of
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