Blackstone, others gear up to list REITs as India finalises rules

By Aditi Shah

NEW DELHI (Reuters) - Blackstone Group(BX.N) and its partner, Embassy Group, are laying the groundwork to cash in on their property holdings by setting up India's first real estate investment trust (REIT) and listing it on one of the country's stock exchanges.

The move comes as Prime Minister Narendra Modi's government works to finalise rules as early as next month that will govern the trusts. The finance ministry is expected then to clarify tax rules for REITs in the budget, people with direct knowledge of the matter said.

The world's biggest property investor and Embassy have a joint portfolio of more than 20 million square feet of offices in India, which is likely to help value their REIT at $2 billion, said Jitendra Virwani, chairman of Bangalore-based Embassy.

Listing REITs gives companies like Blackstone, The Xander Group, an emerging markets investor backed by the Rothschild family, and private equity firm Red Fort Capital, which counts Abu Dhabi Investment Authority among its investors, an attractive option to exit some of their investments.

"We are actually gearing up because we feel the pace the government is moving at is faster than what we would want, so it is better to be prepared much earlier than later," said Virwani, who was set to meet Blackstone on Thursday to draw up a plan for the listing.

A spokeswoman of the tax department did not answer requests for comment. Blackstone did not respond to a request for comment.

The long-awaited move by India will be implemented by the country's market regulator after the ministry clarifies tax rules to transfer assets into a separate vehicle before listing the trust, which had triggered worries over double taxation.

Implementing REITs will also be one early sign from Modi of how he wants to bolster the economy, which is suffering its longest spell of under-5-percent growth since the late 1980s.

India issued draft regulations for REITs in 2008, but was forced to shelve the plans after the global financial crisis dried up investor interest and an economic downturn dimmed the outlook for real estate investments.

If REITs are approved, India will follow China, where regulators in April approved the first property trust. The absence of REITs in China and India made Singapore and Hong Kong the preferred markets for listing property assets in the region.

REITs, listed entities that invest mainly in leased office and retail assets and distribute most of their income to shareholders as dividends, will give developers a new avenue to raise funds by allowing them to sell finished commercial buildings to investors and list them as a trust.

MORE LIQUIDITY

Between 2008 and 2013, private equity funds invested more than 452 billion rupees ($7.6 billion) in Indian real estate, of which more than a third was spent on office and retail assets, according to data from Cushman & Wakefield, an international property consultant.

"If there is more liquidity in the market, if people believe they have clearer exit possibilities, obviously it is helpful to any investor," said Siddharth Yog, managing partner at Xander.

"If REIT laws came into being and a potential REIT listing in India was possible, it could be one of many potential exit strategies that could be explored," said Yog, adding that REITs, however, will not dictate the company's investment plan.

In 2012, Blackstone paid $200 million for a 50 percent stake in three office assets managed and owned by Embassy and mainly located in Bangalore. Earlier this year Blackstone and Embassy hived off their portfolio of assets into a separate vehicle, taking their first step towards listing a trust in India.

The portfolio, leased to tenants like Microsoft (MSFT.O), IBM (IBM.N) and Goldman Sachs (GS.N), generates an annual rental income of 8 billion rupees and Virwani expects this to rise to 10 billion rupees by the time it lists a REIT.

"To have a brand like Blackstone along with us will help us market the REIT and get a better valuation."

(Additional reporting by Rajesh Kumar Singh; Editing by Sumeet Chatterjee and Matt Driskill)