REIT Way to Revive Covid-hit PSUs and Raise Funds For Infrastructure Development
Real Estate Investment Trusts (REITs) have proved to be immensely successful instruments for raising funds, using income- generating real estate assets. This innovative funding vehicle can come handy to turn around the financially hit PSUs in Covid times. Especially when the financially stretched government needs to look beyond traditional means for sourcing capital for PSUs. This can help generate money to the tune of Rs 120 lakh crore which can be used for infrastructure development.
Several PSUs will be requiring capital infusions in the form of fresh equity capital to survive and cover the losses incurred due to Covid-19.As the central government’s finances are stretched, as such it is not in a position to provide requisite capital to PSUs . It is here that REITs can pitch in and the government can raise funds for the PSUs without losing the ownership control at the company level.
According to Shishir Baijal, Chairman Knight Frank India, a global real estate consultancy, in view of the extraordinary interest shown by the foreign investors even during pandemic, it’s an opportune time for the government to use this appetite for rent-yielding office assets for raising funds for the PSUs.
It may be mentioned that the central government owns a large number of PSUs , some of which are listed while others are unlisted and under its sole ownership. Among the listed entities, the government has a controlling stake in the majority of the PSUs.
As per the REIT plan prepared by Knight Frank, the office buildings owned by the PSUs can be transferred to a separate SPV. This transfer can be done through a sale and lease back arrangement with the SPV.The PSU can sign a long- term lease of 20-25 years with pre-defined rental escalations, with room for making the rents to market rate every 8-10 years. The Centre would float/sponsor a REIT which would take control of the SPVs. The amount owed to PSUs due to the sale and lease back , can be transferred in the form of proportionate equity stake in the REIT The government can list this REITon the stock market and raise the necessary funds for the PSUs. In case of financially strong PSUs, a part of the money raised through the REITs can also flow back to the government in the form of dividends.
This fund-sourcing model ensures that there is no change in ownership status at the company level and the employees can continue to work from the same premises. This arrangement will however turn the PSU from an asset owner to a tenant of the building on its balance sheet.
Though the operating cost of PSUs would go up to the tune of rent outgo every year,yet the PSUs will get balance sheet headroom, which will help reduce their financial leverage. PSUs will get the advantage of an alternate source of raising funds at a competitive cost , compared to debt.
This REIT opportunity for PSUs , according to Knight Frank , amounts to Rs 1.2 trillion or Rs 120 lakh crore, based on book value of office assets of 45 listed PSUs. However, if the value of the office buildings of unlisted PSUs and smaller listed PSUs is taken into account, the actual REIT opportunity will be far bigger.
The PSU REITs can be capitalized at 6.4% yield- the trading yield of the two currently operational REITs. REITs can help PSUs raise funds at much lower rates, compared to bonds and NCDs. Moreover, REITs have the inherent advantage of having real estate assets as underlying. REITS for PSUs will offer value propositions to investors . REITs are a stable product and have a proven track record of offering stable returns across business cycles globally and are used as a portfolio diversification tool. The dividends from REITs in India are exempt for tax purposes provided the REIT adopts the old rate of corporate tax. Further, REITS provide scope for capital appreciation and any gain through capital appreciation is taxed similar to debt.
There are several mutual funds, pension funds and insurance funds which invest a significant percentage of their assets under management in G-Secs, bonds/NCDS floated by sovereign entities. REITS can serve as a credible alternative for this set of investors.For retail investors , government backed PSU REITs can serve as a credible alternative to sovereign backed saving schemes like PPF, NSC etc.REITs have an advantage of offering greater liquidity, compared to other instruments and can be sold at any time without any restrictions.Dividends are tax-free for REITs and they provide scope for capital appreciation.
A similar capital raising model can be used to monetize rent-yielding assets of Indian Railways, Metro Rail, Airport Authority, Bus Terminals etc who get monthly rent from occupiers of their premises. The money raised through this monetization model can be used for new infrastructure development.
The writer is Editor, PropTOQ real estate magazine