Monetizing land assets for Government...

The central and state governments are faced with an acute challenge of raising revenues. With the Central Government committed to lowering Direct taxes and rationalizing Indirect Taxes through implementation of GST, resources are becoming scarcer. The Government needs to come up with newer ways of managing its cash flows without burdening the common man. 

Image Credit: www.thehindu.com

One of the most underutilized assets in the country is Land. This is also because land for India and Indians is a very emotive subject causing strong feelings amongst people. Monetization of land assets is usually unpopular, a long drawn process and does not have any clear process. Therefore land as an asset is hardly ever monetized until and unless the situation is really dire. 

Asset monetization is basically a business transaction that converts a dead/idle asset into an income generating one. This “unlocking of value” where economic benefits can be derived from embedded operational assets should be undertaken only after due diligence and the viability and benefits are demonstrated

Till date the land asset monetization was heard of only in context of recapitalization of the Non-performing/stressed assets for the banking system. But, slowly and surely this is changing and today it is also being heard of in the context of unlocking value from a zero-revenue asset.

An approach that is process-driven to monetizing the realty assets of Government(land and buildings) could help drive significant annuity revenues for the government. If thorough processes can be put in place to help drive the entire exercise, it could serve as a benchmark for others who may want to unlock similar values.

Land monetization has suddenly caught people’s fancy and there are all sorts of numbers being bandied around on how for example, even if a parcel of the total land can be monetized, its value will be bigger than India’s GDP. Some other numbers state that around 4000 sq kilometers of land is lying idle with state government PSUs itself. One needs to be careful of the numbers since it isn’t an easy 2+2 that makes 4 here. Not all land can be monetized equally and this is something that all analysts seem to have completely forgotten. 

A process needs to be set up by which, as a first measure, detailing the land assets for all government organizations should be undertaken. Once a detailed list of all such assets can be streamlined, it will help bring transparency to the process. 

Only after a thorough mapping, will the question of what can be monetized come up. Consulting companies could then get involved in the process so that the type of “value that can be unlocked” can be detailed for different parcels of land. These could be the very foundation on which public/private participation could be sought. 

Realty companies may be interested in being a part of such an exercise since it gives them an entry into locations that are developed and may help drive businesses. Ultimately, that should be the sole aim of the exercise – the government should help drive businesses and raise annuity revenues for itself in the bargain. 

For example, government-run company MTNL, which operates telecom services in Delhi and Mumbai, has a reported 250 acres of land in two of the biggest metros in India. Partnering with a company that can help lease the office space to companies could help the struggling company with a healthy annuity income. BSNL is reported to have carried out some work for identifying and monetizing land parcels across the country. Both the telecom companies under the Communications Ministry could focus on a turnaround strategy after such rental income can add cushion to their balance sheet. 

There has been a move in the past to monetise surplus land parcels with government owned companies. According to one estimate, 60 sick government companies together owned nearly 50,000 acres of land that could be monetised. Opposition from labour unions is often cited as one problem that has plagued the effort. If all the workers can be part of the solution and can see their own benefit in the changes that are sought to be brought about, it may be possible to get their buy in.

Land parcels like these can be used to bring around a sea change in the residential or commercial landscape of major cities. Should it be so devised, they could be used for budget housing projects with some commercial real estate opportunities so that it can be monetised too. If the government does go ahead with a project of this kind, it will need to be executed with clockwork precision so that the cost does not spiral out of control. The social implications of such a landmark could set a benchmark for various state governments too, if executed well.

The government can consider a lease-only model so that it can reap the benefits of annuity income. If one successful project can be showcased, its learning can be used to drive other similar projects in states. 

Earlier efforts to raise resources through disinvestment have kicked up storms over allegations of assets being undervalued and the process being fixed. In order to prevent a repeat of the past, sufficient checks and balances should be incorporated in such an exercise and all the stakeholders including the public should be sensitised. If properly implemented then monetisation of land can be a game changer for Government revenues.

First published in ET Real Estate

http://realty.economictimes.indiatimes.com/realty-check/monetizing-land-assets-for-government/1837

REITS ARE READY TO TAKE OFF?

Image Credit: www.nyu.edu

 There has been much excitement about the future of real estate investment trusts (REITs) in India on the back of two interesting developments recently. 


The first was a regulatory change where SEBI allowed REITs to invest up to 20 per cent of their corpus in projects which are under construction. The second was the policy change which now allows REIT investment into educational institutions.

For the realty industry which has been cash strapped for some time now, this is great news. Several companies could use this route to unlock the value in their educational ventures and that is why policymakers should be closely watching the developments.

India is now waking up to REITs, which is an established mode of investment for institutional as well as retail investors for the real estate sector.

REITs have emerged as a tax efficient way to unlock value for real estate companies. Developers invest huge sums in acquiring land, stay invested to build the property as a commercial, healthcare or educational venture which gives a healthy annual return. With REIT funds for educational projects now a reality, realtors have one more option to unlock value for the assets that they own.

REIT is an investment vehicle that parks money in realty projects that have been completed, hence earning rent for the investors. Since it has annuity income, it is referred to as one of the policy measures that can, potentially, transform the Indian real estate sector. At a time when realty returns are negligible, REITs for educational institutions can be a boon for the industry.

SEBI’s regulation has, after careful consideration, decided to keep REITs confined to high net worth individuals. Its conditions impose enough checks and balances on the functioning of REIT to ensure there is transparency in their operation and that the interests of the investors are protected. SEBI’s regulation, debated and discussed at length as it evolved from the beginning of the decade, seem to be a little out of sync with reality.

The recent decision to remove dividend distribution tax and allowing REITs to invest 20 per cent of its investments in projects under construction are welcome. It confirms that the policymakers are in the right direction to make sure REITs can take off. A more aggressive nudge by the policymakers and regulator would help realty companies out of the tight liquidity they find themselves in.

If implemented in the right earnest, these changes have the potential to unlock value for shareholders and assets that these companies are saddled with. Since India’s market regulator does not allow retail investors to invest in REITs, it will not be possible for them to be part of the wealth creation under the REIT model.

But global experience shows that several REITs are also listed at select exchanges, which gives an opportunity to study their performance based to returns given to the markets. Five year returns between 12-24 per cent for REIT funds have been seen in different markets. Japanese and Malaysian markets have been found to have returned 7-12 per cent returns.

For the Indian markets, REITs will be governed by guidelines of the market regulator, Securities & Exchange Board of India (SEBI). It will have to comply with the need for an independent trustee, auditor and others.

Several global funds are looking for better returns and have been eyeing emerging economies to park their funds. India’s strong growth, led by domestic consumption, could be just the right opportunity for these funds. For realty companies, it would mean institutional investors buying a part or entire stake into their projects for annualised returns. That liquidity and unlocking of value could be critical for fuelling further growth for the realty companies.

Creating the win-win situation that could marry the needs of policymakers looking to drive growth further, investors seeking better returns and realty companies who could unlock value hidden in their assets could just be music for India’s growth story.

If there was a perfect opportunity for investors to put in money in India’s commercial real estate and exit after a good return, nothing could be more perfect than REITs.