Budget 2023 Impact | REITs: REITs remain a good tool for retail investors; HNIs may have to pay more tax

February 13, 2023

“Post Budget announcements, if anyone is going to get a bigger hit, it is going to be our HNIs and ultra HNI clients who used to take this opportunity to get maximum yield through the REITs investment but now since this option is not available, their overall post-tax yield is going to be reduced approximately by 1%,” says Prasad Sawant, Advisory Head-Franchisee Vertical,

I want to understand the current tax implications that are involved under REITS.
We need to understand how the REITs used to distribute their income. First, through interest; secondly through a dividend and lastly as a repayment of debt. The repayment of debt prior to this was not taxable but in this year's Budget, our finance minister has announced that from next financial year, it is going to be under taxable income. So from here on, we may see some decrease in the yield because overall, 37-47% of their distribution was through repayment of debt.

If anyone is going to get a bigger hit, it is going to be our HNIs and ultra HNI clients who used to take this opportunity to get maximum yield through the REITs investment but now since this option is not available, their overall post-tax yield is going to be reduced approximately by 1%. But at the same time, this is a good opportunity for our retail investors. Why? Because we have seen that overall these REITs are being offered as of now at a discount of 10% to 29% from their NAVs. So retail investors can enter into these particular REITs as of now. In the next financial year, it is going to be taxable for those who are under 30% tax slab.

So let us dissect this further. You are telling me that it becomes more attractive for an investor.Like for example, if I go and take some units in a particular REIT now, how is this change benefiting me and my exposure? Could you just explain this via an example?
As of now, retail investors can invest in the three listed REITs – Embassy, Mindspace and Brookfield REIT. All these are in the range of 250 to 350 per unit. One can invest into these particular REITs and after that, the distribution of income is through dividend interest and repayment of debt. As far as the Embassy REIT is concerned, in the current financial year they have till now approximately shared 6-7% as distribution of income. Out of that, 2.5% is in the way of repayment of debt.

So, you being a unit holder, are not going to have to pay the taxes against the repayment of debt since you are the retail investor. But in the case of HNIs who are under the 30% tax slab, their yield would be hampered from here on since their overall income is more than the overall taxable slabs. So being a retail investor, there should not be any worry about it.

So far, we just have three REITs in the market. Do you think after the Budget announcements, the industry would come ahead and launch more REITs? Will announcements like this discourage or dampen the sentiments of the industry?
Not exactly because India has a long way to go from here. Our economy is very stable and we have really big space to cover in infrastructure space. REITs are Real Estate Investment Trusts in which generally big institutions are getting in and in future we will have more such listings because these are related to our infrastructure development as well as our economical growth across the globe.

So these kinds of amendments or changes would not hamper any such sentiment and we would see more such REITs listing. As of now, only three are listed but they are offering a really good rate of return. Since their listing, they have offered nine to 16% of returns till now and we may see a good upside from here on. We are waiting for some positive news as well.

We are waiting for the DESH Bill to be proposed and passed in our parliament wherein we are expecting that over a bit of time the occupancy level in all these REITs would get good growth and because of which we may see good upside in these listed REITs as well as upcoming REITs.So far why have investors been lukewarm about investing in REITs?
As of now, the interest is not there because those who are entering into the market for returns of above 15% would not get into this. Why? Because as of now, the current rate of return is in the range of 9-14%. Once we get this Development of Enterprise and Service Hubs (DESH) Bill passed in Parliament, we may see a good occupancy level. This was hampered especially by Covid because their income is dependent on occupancy level. So unless and until their occupancy level grows in coming months, there would not be a good movement in these listed REITs.

Over a bit of time, say in the next two to three quarters, we are expecting these occupancy levels to go up and we have given good targets. For example for Embassy REITs, which is currently trading at Rs 321, we have given a target of Rs 410, an upside of approximately 30%.

Then for MindSpace and Brookfield, we have given targets above 20%. I would definitely recommend our retail investors to get into it and HNI investors they can also get into it only with a lower post tax yield from here on.

Can REIT be something that can be tied up as a retirement investment tool?
I do not think so because this would not give regular returns though till now, they have shared 6-9% of distribution of income on yearly basis. Those who want to get into these instruments for their retirement planning, can park approximately 10 to 15% of their corpus because over a period of time we may see good upside in their overall returns but if they are expecting regular income through these REITs, then this is not suggested for people who are looking to park their money for retirement planning.

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