Investing in Special Economic Zones (SEZs)

Special Economic Zones (SEZs) are business areas that are developed with a particular purpose in mind. SEZs have economic laws different from the country's typical economic laws. The goal is mostly to increase foreign investments, create jobs and develop the economy. This is achieved by offering attractive terms to landowners, builders, and tenants. India was one of the first in Asia to have an Export Processing Zone (EPZ) in 1965, while the SEZ Policy was announced in April 2000.

The Significance of SEZs

Any CRE (commercial real estate) is as beneficial as the quantity and quality of work that gets done there. From this perspective, SEZs practically blow every other CRE out of the water. A wide range of incentives help companies in SEZ work better and hire more employees. Since the enactment of the SEZ Act, over 20 lakh jobs have been created, with an incremental growth of 25.19% year-on-year.

The facilities and incentives available to tenants in SEZs include the following -

1. Manufacturing or service activities allowed
2. Full freedom for subcontracting
3. No license required for import
4. Duty-free import/domestic procurement of goods
5. GST exemption
6. A single window of clearance for Central and State approvals
7. Direct Tax and Indirect Tax benefits

As of November 2020, there are 262 operational SEZs across India. The majority of these are home to IT, ITeS, and manufacturing companies and often host multinational entities.

Investing in an SEZ Asset

Let us understand how investing in SEZs plays out for an investor. The salient points that an investor would be interested in regarding a commercial real estate opportunity are –

1. Location
2. Lease terms (projected returns, lock-in, and the lease period)
3. Tenancy

Taking these into consideration, SEZs prove to be a great investment opportunity.

SEZs are premium locations

SEZs are always built in places with good connectivity to transport hubs and are close to other prime commerce centers. For example, TIDEL Park in Chennai is close to the airport, near a local train line, and is next to a 6-lane expressway.

SEZ assets have lucrative terms

The projected returns for SEZ assets are generally favorable, ranging between 7-9% rental yields. Lock-in and lease periods also follow the norms of standard CRE lease terms.

SEZs attract Tier-I Tenants

Businesses that choose SEZs as their base of operations are mostly MNCs and Fortune 500 firms who are typically stable, low-risk tenants. To add to it, since they aim to benefit from the compliance and tax relaxations, they are less likely to move out or scout for new office spaces.

There is also a secret benefit of SEZs for investors. SEZs are on a perpetual lease. One cannot own a unit therein forever. A perpetual lease means there are no registration fees to be paid by the investor and the lease terms have to be renewed before the expiry of the old terms. The stability of investment is thus guaranteed. But there’s a catch - only a company can lease an SEZ meaning SEZ assets are out of the reach of individuals.

In terms of office spaces, SEZs will always have an edge over other CRE options. The demand for premium office spaces in India still stays strong. It is interesting to note that despite the fast approaching sunset date of March 31st, 2020 (no direct tax benefits to occupiers post that date), companies are still vying for space in SEZs and vacancies in SEZs remain low.

Through the fractional ownership model (such as Strata’s), even a retail investor can invest in SEZs.

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