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REITS – Game Changer for Commercial Real EstateIndia Shopping Centre Forum 2016

NEERAJ BANSALPartner & India Head of BCRE Sector

11 May 2016

Global REIT

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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


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.


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.


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


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


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%


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


Implication for Indian retail sector


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


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


Prime Main Streets Banjara Hills Kukatpally Jibilee Hills MG Road

Chennai


Prime Main Streets Khadar Nawaz Khan

Road Pondy Bazaar Usman Road-South Velacherry

Ahmedabad


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


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


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


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


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


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%


REIT to help retailers maximize their potential

Unbundling Real estate

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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