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Is this the answer for India's dilapidated real estate market?

Indian labourers work at the upcoming power sub station at the Gujarat International Finance Tec-City (GIFT City) on the outskirts of Gandhinagar, some 30 kms from Ahmedabad on June 26, 2014.
Sam Panthaky | Getty Images
Indian labourers work at the upcoming power sub station at the Gujarat International Finance Tec-City (GIFT City) on the outskirts of Gandhinagar, some 30 kms from Ahmedabad on June 26, 2014.

India's dilapidated infrastructure and real estate market is set to get a boost after the nation's securities regulator gave the green light for the creation of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (IIT) on Sunday.

"The decision just announced by the Indian securities regulator... after years of delays is great news," said Rajiv Biswas, chief economist for Asia-Pacific at IHS.

"It will support domestic and international investment inflows for the development of Indian smart cities, as well as mobilizing foreign investment inflows into other Indian real estate and infrastructure projects," he added.

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India's real estate stocks surged on the news. DLF Ltd, India's largest real estate company, gained 3.5 percent in Monday morning trade, while Prestige Estates Projects Ltd rose 2.9 percent and Indiabulls Real Estate Ltd jumped 3.8 percent, amid hopes that the rule change would give the cash-strapped, debt-ridden sector a fresh source of financing.

"Companies like DLF own a lot of commercial real estate on their balance sheet so this development means they will be able to de-leverage their balance sheet significantly," said Shobhit Agarwal, managing director of Capital Markets in India at property research firm JLL.

REITs are listed instruments with exposure to income-producing real estate assets, which are normally commercial. Earnings from these assets are distributed to shareholders through dividends.

The Securities and Exchange Board of India (SEBI) also approved infrastructure investment trusts, REIT-like structures that allow developers to monetize their infrastructure assets through a stock exchange listing.

India's infrastructure is often the subject of much criticism, with many analysts arguing the issue is holding back the economy's growth potential, which dropped to 4.5 percent in the fiscal year ending in 2013 from 9 percent in 2010-2011 fiscal year.

Analysts blame a lack of progress on natural resources shortages, corruption, retreating investors and the pressure of a large and growing population.

India's urban population is projected to reach 590 million by 2030, from 340 million in 2008, according to McKinsey Global Institute.

IHS' Biswas said the rule changes will help Prime Minister Narendra Modi achieve his goal of building 100 so-called "smart cities", outlined in the 2014 Budget, which Modi says will pump over $1 trillion into the nation's infrastructure system.

Modi's definition of a "smart city" is an urban space that is livable, eco-friendly and technologically integrated, that will provide next generation services to its residents.

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"The development of Indian smart cities, with modern, highly efficient infrastructure for electricity, transport and IT, will create a new competitive landscape for the sub-continent that will be much more attractive for foreign direct investment by global multinationals," said Biswas.

JLL's Agarwal said he saw little correlation between the smart city plan and the REIT and IIT legislation, however.

"There be a mild correlation between the two but it's not obvious Modi is doing this to create liquidity for the smart cities," he said.

"This loosening of the wallet on the REIT side is nothing new. the first half of the REIT regulation came out in 2008, and for some reason it was not regulated it's not a new event," he added.

However, Argawal added that he thought the development was very positive for India's real estate and infrastructure market.

"It's good for the country - even in Asia we are the second last country to announce REITs regime, it was overdue. Now a lot of the new money that is coming into the country will go into this segment as it provides a stable return and it's good for the market as it will deepen the markets," he said.

SEBI had planned to introduce REITs last October, but the plan was delayed amid disagreement over their taxation structure.

The decision comes a month after India's finance minister Arun Jaitley said the trusts would be exempt from federal taxes as long as they transferred the bulk of their income to shareholders in his budget address, finalizing debates around the issue.

Under the rules, only commercial buildings, such as office buildings or shopping malls, can be part of a REIT in India, and all REITs have to be listed on a stock exchange.

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