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KPMG.com/in
REITS – Game Changer for Commercial Real EstateIndia Shopping Centre Forum 2016
NEERAJ BANSALPartner & India Head of BCRE Sector
11 May 2016
Global REIT
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3
Global REIT evolution
Globally accepted investment vehicle for investing in real estate More than 20 countries now have REIT or similar structure However, not all countries have witnessed success with REITs
1960s 1970s
CanadaThailandBelgium
USANetherlands
South Africa
1990s 2000 2010 Future
Australia
JapanSingaporeHong KongUKGermanyGreeceFrance
ChinaSpain
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4
Global REIT comparison
Source: Overview of REITs – Morgan Stanley; KPMG in India analysis
US UK Australia Japan Singapore HK
Year of introduction
1960 2007 1971 2001 2002 2003
Number of REITs 393 41 52 51 37 13
Real estate as % of country’s Mcap
3% 2% 4% 4% 9% 8%
REIT as % of real estate market
53% 50% 78% 42% 34% 6%
REITs issuance in 2014 (USD Bn)
32 4 1 8 2 -
Key success factors Highly successful in US, Australia and Singapore
Limited success in Hong Kong due to poor handling of first few REITs, tax benefits etc.
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5
Best practices
Source: Overview of REITs – Morgan Stanley; KPMG in India analysis
Key global learnings to make REIT successful
Tax structuring – essentially making REITs a pass-through vehicle
Lower stamp-duty
Successful listing of first few REITs help in raising investment sentiments
Allowing limited investment in property development
Allowing domestic provident and insurance funds to invest in REITs
Allowing REIT to invest in foreign jurisdiction
Flexibility with respect to borrowing and leverage its assets.
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6
Forms of REITS
6
Diversified (office cum retail)
Self-storage
Residential
Retail
Office
Specialty (movie theatretelecom tower etc.)
Infrastructure
Healthcare
Lodging
Industrial
Different types of
REITs
Different types of
REITs
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7
Retail asset is almost a quarter of Global REITs value
Singapore
United States of America
26% 16% 19% 11%
28% 11% 10% 6%
Retail Office Diversified Hospitality
Source: Overview of REITs – Morgan Stanley; EPRA Monthly Statistical Bulletin (Jan 2016); KPMG in India analysis
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8
Retail asset is almost a quarter of Global REITs value
Global
26% 12% 27% 3%
Retail Office Diversified Hospitality
Source: Overview of REITs – Morgan Stanley; EPRA Monthly Statistical Bulletin (Jan 2016); KPMG in India analysis
Asia
19% 12% 56% 1%
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 9
Success factors
5
4
3
2
1 Optimum tenant mix
Creative and aggressive marketing strategies
Continuous improvisation based on consumer preference
Connectivity and accessibility
Anchor tenants
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10
Implication for Indian retail sector
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11
The changing face of Indian Retail sector
28% Growth in disposable income between 2012-2014
1 croreAnnual urban population growth
3xExpected growth of organized retail
3rdHighest brand conscious buyers globally
400Foreign brands
570Malls operational in India
36 croreYouth in India – highest globally
45
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 12
About 70-75 million sq ft retail real estate REITable
Delhi-NCR
25 mnsq ft of mall stock
Prime Main Streets Connaught Place Khan Market DLF Galleria,
Gurgaon Sector 18, Noida
Kolkata
4 mn sq ft of mall stock
Prime Main Streets Park Street Camac Street Elgin Road Theatre Road
Hyderabad
3 mn sq ft of mall stock
Prime Main Streets Banjara Hills Kukatpally Jibilee Hills MG Road
Chennai
5 mn sq ft of mall stock
Prime Main Streets Khadar Nawaz Khan
Road Pondy Bazaar Usman Road-South Velacherry
Ahmedabad
4 mn sq ft of mall stock
Prime Main Streets CG Road SG Highway Satellite Road Prahladnagar
Mumbai
16 mn sqft of mall stock
Prime Main Streets Linking Road Kemps Corner Colaba Causeway Lokhandwala-
AndheriPune
7 mn sqft of mall stock
Prime Main Streets MG Road JM Road FC Road Aundh
Bengaluru
5 mn sq ft of mall stock
Prime Main Streets MG Road Brigade Road Commercial
Street Jayanagar 4th
Block, 11th Main
Delhi-NCR
Kolkata
Hyderabad
Chennai
Bengaluru
PuneMumbai
Ahmedabad
Mature Advanced DevelopingSource: Cushman Wakefield
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 13
Key considerations for retailers for REIT
Number of properties
Key considerations for retailers
Current usage of assets
Growth capital required Current delivery model
Infrastructure requirement
Real estate strategy
Gross Margins growth rate
Taxability at corporate level
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 14
Case study – Penn National REIT
Penn National owns, operates or has ownership interests in gaming and racing facilities with a focus on slot machine entertainment.
On November 15, 2012, PENN announced that it intends to separate its gaming operating assets and real property assets into two publicly traded companies - one an operating company and the other a REIT.
Simply by announcing their intention to create a REIT, PENN created approximately $850 million of value for shareholders – or a one-day increase of 28.2%.
From the November 15, 2012 announcement until the November 4, 2013 completion of real estate spin-off, PENN’s share price increased 56.8%
Source: Perspective on Value Creation, Barington Capital Group, LP
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 15
Case study – Penn National REIT
PENN’s REIT spin-off, Gaming and Leisure (GLPI), began trading on October 14, 2013
Since trading GLPI’s shares increased 20-25% within 2-3 months
On December 9, 2013, GLPI announced their first acquisition when they acquired a riverboat casino complex
Source: Perspective on Value Creation, Barington Capital Group, LP
India REIT structure
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 17
Investment by REIT
REITMax. 20% in other
investmentsMin. 80%
• Listed equity shares of real estate companies
• Unutilized FSI• TDR• Government
securities etc
Under construction properties
Completed, but not rent generating etc
Investment through SPV (by acquiring controlling interest and not less than
50% shareholding)
Direct investment in asset
Atleast 2 completed and rent generating projects
Tenant/Lessee/licensee
Max 10%Upto20%
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18
REIT to help retailers maximize their potential
Unbundling Real estate
Q&A
Thank YouThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Tax implications of REIT explained
REIT
Sponsor
SPV holding property
Investor/unit holder
Shares in SPV in exchange of units of REIT (not regarded as a
transfer – No CGT)
Interest and rental income exempt in the hand of REIT
DDT exempt in the hands of REIT and SPV
Gain on transfer of capital assets subject to CGT
Other income subject to maximum marginal rate of 30%
Interest income and rental income received from REIT owned property is subject to WHT
Gains on sale of REIT units (LTCG exempt/STCG @ 15%)
Gains on sale of REIT units (LTCG
exempt/STCG @ 15%)STT @applicable rate
Invest money Allotted REIT units
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