Increasing Role of REITs & INVITs in Asset Allocation

The year 2007 is perhaps most fondly remembered for the final over drama at the oval and the proud smiles of our Indian cricketers at their triumph against Pakistan in the T20 world cup. Amidst all the noise and smiles associated with this, a lesser celebrated fact was that SEBI came out with the first draft of regulations for REITs in India.

While REITs/ INVITs are popular in developed countries and SEA, they have been slow to pick up in India. However, REITs and now INVITs have seen major investor interest, from institutional investors and individual investors alike over the past few years. So, what exactly are these instruments?

How should an investor think of these products?

These are thematic funds organised under a trust structure which collect investments from investors and invests in real estate / infrastructure projects. The returns generated from such projects/property (interest / rentals / capital gains) are distributed to the investor. The regularity of distributions means the REITs and INVITS are hybrid instruments – having a fixed-income coupon while also providing an investor the growth of the underlying business and option of immediate liquidity on stock exchanges.

REITs make it possible to add real estate without the huge capital costs. It also helps mitigate the problem of liquidity as an investor can’t sell one’s property on short notice and ample paperwork. Similarly, INVITs offer an investor access to the revenues earned from large infrastructure projects including power distribution units, highway tolls.

The INVIT is designed as a tiered structure wherein there is a sponsor who sets up the INVIT, which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs).