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Dream 11

Incumbents, as well as opponents, have announced many populist schemes around Lok Sabha elections. Any government that comes to power will have to think of innovative ways to raise resources if it’s serious about fulfilling electoral promises. Costs of populist schemes are really huge.

For instance, the centrally funded scheme of direct income support to twelve crore marginal farmers will demand Rs 72,000 crore. Whereas, the electoral promise of Rs 72,000 to five crore poor families will cost Rs 3.6 lakh crore to the exchequer.

In the first 11 months of FY 2018-19, the government ran up a fiscal deficit of Rs 8.51 lakh crore. We as a country seem to be caught between mutually exclusive objectives of containing fiscal deficits and adequately funding various government-sponsored schemes. Let alone the money needed to build infrastructure and modernise defence forces.

This is quite evident from the fact that disinvestments as a percentage of fiscal deficits have been climbing constantly over the past few years.

High reliance on disinvestments…

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(Source: Department of investment and public asset management, Reuters)

All governments, till date, have found it challenging to raise revenues given the limitations we, as a country, have. You see, there are constraints on increasing tax rates for super rich and corporates. Introducing draconian taxes such as inheritance tax or taxing wealthy farmers will have massive political costs.

What’s the way out?

The government might soon have to monetise its land assets.

In 2012, the Vijay Kelkar Committee recommended that the then government should monetise unutilised and underutilised government land for the development of infrastructure projects. Moreover, the Comptroller and Auditor General (CAG) too had pointed out the sub-optimal management of defence estates.

That said, monetisation of government land has never been an easy task given the scope for scams.

The Modi government might have found the solution to this conundrum. It has been pondering upon experimenting with new models to monetise the government’s real estate assets in the most transparent manner to discourage malpractices and raise money for developmental programmes.

After trying out the ETF route to disinvest from PSUs, the Modi government is now eyeing the Real Estate Investment Trust (REIT) route to monetise real estate assets.

REIT for monetising real estate assets…

For starters, a Real Estate Investment Trust or REIT offers individuals and institutional investors an opportunity to invest in a diversified portfolio of income-generating real estate assets, which can be blended with properties with developmental scope.

Like mutual funds, REIT also works on the principle of collecting household and institutional savings through the structure of a trust and issuing them units against their investments in rent-yielding properties. REITs are usually listed on exchanges and can be traded like ETFs and shares.

The primary objective of a REIT is to generate regular income; capital appreciation is the secondary objective. Depending on the market, properties and demand-supply dynamics rental yields and potential for capital appreciation differ.

Global REIT market…

According to Nareit, FTSE Nareit All REITs Index generated 15.04% average annual total returns between February 1999 and February 2019. At the end of March 2019, FTSE Nareit All REITs Index comprised of 225 REITs. Their total market capitalisation was USD 1.13 trillion.  Nearly 187 REITs were listed on the New York stock exchange and their collective market capitalisation was USD 1.08 trillion.

Globally, some REITs such as Easterly Government Properties (DEA) are focused on managing properties leased to governments.

REIT in India

REIT is relatively a new concept in India. Country’s first REIT, Embassy Office Parks, recently got listed. Although it’s too early to call it a success, the initial response to Embassy Office Parks has been encouraging. The REIT is trading at nearly 10% above its offer price, that too within 50 days.

Embassy Office Parks had a leasable area of 32.7 million square feet as on December 31, 2018, which it valued at Rs 314,809 million or Rs 31,481 crore.

Assessment of central government’s office space…

According to the 7th Pay Commission report, 46.9 lakh employees work in various departments of the central government. If you assume every central government employee occupies 100 square feet of office space, by the most conservative estimate, the total office portfolio of the government would be 469 million square feet, 14 times of Embassy’s portfolio. The estimated market value of this portfolio would be around Rs 4.6 lakh crore.

If you add to this, office space owned by all state governments the aggregate value of government-owned office space (central + state) would swell to Rs 27.6 lakh crore.

And that’s not all.  Government owns a massive land bank across the country.

How much land does the government own?

According to government records, central government owns approximately33.3 lakh acres of land. This is nearly 9 times the size of India’s capital city, Delhi. On top of it, the Defence Ministry owns nearly 16 lakh acres of land. If you exclude land owned by railways, since most of it is alongside tracks, the estimated value of land owned by the central government is Rs 26.4 lakh crore.

Let alone state governments’ land parcels. Estimating the aggregate value of land holdings of states has been a tough task given the lack of dependable data on land banks of various states.

The combined worth of office spaces of the centre and states and the land bank of the centre would be approximately Rs 54 lakh crore. Are you wondering how big this number is? It’s about 2 times India’s total estimated expenditure for FY 2019-20.

If the government decides to offer even 2% of the Rs 54 lakh crore under REIT, on an experimental basis, the first tranche of government-backed REIT would be over Rs 1 lakh crore.

Way forward…

The centre and states will have to work in sync, like they did at the time of implementation of GST, to ensure successful implementation of the REIT model to monetise government (public) owned real estate assets.

What’s the use of owning an asset if it can’t be used to fulfil the aspirations of 1.3 billion Indians?

Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. The information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.

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