Air India plans REIT route to reduce debt

New Delhi: In a move that could give the company significant tax breaks and also improve its finances ailing state-owned airline Air India is mulling to convert its non-core real estate assets into a real estate investment trust (REIT) and list it on the stock exchanges.

Air India has about 800 properties at prime locations across the world, which include several acres of land, office buildings, sports stadiums and residential colonies. Its Mumbai headquarters on the high street of Marine Drive alone is estimated to be worth about Rs.2,250 crore.

In 2013-14 the air carrier reported Rs.19,300 crore revenue but ended with a loss of Rs.5,388.82 crore. The airline’s debt was stood at Rs.40,000 crore as on 31 March.

“We have a lot of land assets and this is one of the routes of monetization. We are considering the option, but a lot of work has to go in,” an Air India executive, who did not want to be named, said.

He said financial experts had already made a presentation to Air India management on the merits of the REIT route and that the airline’s finance team plans to move forward with this.

“If it works out, we will hold 51% in the REIT; the properties will remain ours but be leased out at the best prices,” he added.

REITs, which were first introduced in the US around 50 years ago, are listed on exchanges and use money raised from the public to buy real estate.

A REIT can be set up by a developer or any independent fund manager. The minimum investment to be made is Rs. 2 lakh. And if the REIT pays out 90% of its distributable income to investors, it gets a tax exemption. However, those who get the dividends are liable to pay income tax.

The civil aviation ministry has asked Air India to consider this option to reduce its debt. The airline has an 18% share of the domestic market and a 17% share of the international one, and is in the midst of a Rs.30,000 crore equity infusion by the government that is expected to turn around its fortunes by 2021.

There is no clarity on how much the airline plans to raise through its REIT, a MINT report said. If Air India goes ahead with its plans, it will create among the first REITs in India, after the Modi-headed government allowed the creation of such entities in July.

India’s capital market regulator, the Securities and Exchange Board of India (SEBI), too has recently approved final regulations for REITs, although these are yet to be notified.

REITs may provide a new source of funds to Indian firms with large land banks, helping them reduce debt, and by 2020, some $20 billion worth of property and land could be held through REITs, according to an estimate by property broker Cushman and Wakefield.

 

“A REIT offers a regular return on investment and it also captures upside on the appreciation in the value of underlying property. Most of the other instruments either offer regular return (debt securities) or only upside (equity/equity-linked securities),” said Bhairav Dalal, associate director, PwC India.