REITs and InvITs: Two Emerging and Promising Asset Classes
There is an old joke (and belief, to some extent) that if you want to make a big fortune in the stock market, you have to start off with a small one.
That may or may not be true. But what is definitely true is that to make any kind of fortune in the markets today, one need not rely exclusively on stocks. There are some newer asset classes in play now.
Two alternatives which particularly stand out are REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts).
Both are relatively young instruments in the Indian context and although they vary when it comes to specifics, they both offer unique and similar mechanisms to raise capital.
FYI: Albeit we have covered explainers on REITs and InvITs previously, a lot more has happened on their investing and regulatory fronts since.
Now, we bring you a roadmap of these “developments”.
A Brief on the Basics
Traditionally, in India, real estate is owned in real property terms, like registered ownership of a house or a building. REITs are a break in that tradition because they include ownership of securitised real estate assets.
Basically, REITs are securities (units) with physical real estate as the underlying asset which can be traded on the stock exchange post listing. While REITs deal with commercial/residential real estate (more specifically, “income generating” real estate), InvITs deal with dedicated infrastructure projects like ports, roads, dams etc. (projects with “long-term” gestation periods). Consider the two as first cousins in the investing world.
Both REITs and InvITs were introduced in the US in the 1960s. But it wasn’t until 2014 when they were operationalised and came under regulatory purview in India.
The first REIT was launched in 2019 (Embassy Office Parks). At present, these are the listed REITs and InvITs in India:
- Embassy Office Parks REIT
- Mindspace Business Parks REIT
- Brookfield India REIT
- IndiGrid InvIT
- IRB InvIT
- Power Grid InvIT
Operation and Regulation
The reasons why these new-age investment instruments have caught the market’s attention lately can be summarised as follows:
- Ability to generate a source of regular income through dividends.
- Potential to provide attractive capital appreciation.
- Small-ticket sizes of investment.
- Much higher liquidity than a direct investment in the realty market or infrastructure project.
- Lower risk as 80% of the corpus is invested in income-generating and completed (read:stable) projects.
The unique selling point of REITs and InvITs lies in the fact that they provide impressive entry points of investment for sectors plagued by illiquidity. They turn the asset-heavy model of a sector like real estate or infrastructure into an asset-light model due to their derivative nature.
From a macroeconomic perspective, critical infrastructure projects could also be funded by these instruments thereby reducing the burden on Government resources. This would also spur a higher industrial growth. Perhaps, that is why, the state functionaries have been quite supportive of REITs and InvITs.
That’s right. The regulatory support towards REITs and InvITs has been stellar in India. The Government, keeping up with its Budget 2019 promise, helped in creating a favourable tax regime and liberalised the ability to invest in these instruments. Numerous legislative changes have been made to open them up to a wide range of retail and institutional investments, including FPIs. In fact, dividend payments to REITs and InvITs are also exempt from TDS (Tax Deducted at Source) to make compliance easier.
SEBI has assisted in the process further by making enabling provisions for REITs and InvITs to source funding from large sections of the capital markets and enlarge their potential capital pool. For instance, the minimum application value for retail investors of REITs and InvITs was reduced by SEBI last year to the range of ₹10,000–15,000 ($134–202), thus bringing them at par with other equity-traded instruments in the market. The regulator also permitted the listing of foreign REITs and InvITs in the GIFT City IFSC last year.
Performance and Potential
India’s real estate sector is projected to reach a $650bn valuation by 2025, contributing 13% to the national GDP. This is particularly encouraging for the promotion of the REIT/InvIT trend in the country due to their business model which focuses on monetising rent-yielding commercial spaces and highly-valued infrastructure complexes.
Currently, there are 11 REITs and InvITs in operation in the country with 10 of them possessing the highest-level (AAA) investment rating. REITs, in particular, have braved strong headwinds even during multiple COVID waves with their portfolio occupancies remaining above 80%.
India has approximately 650 million sq. Ft. Of Grade A office space out of which close to half are REIT-able for the taking. In the past year alone, both Brookfield and Blackstone (sponsor of both Embassy and Mindspace REITs) have added 30 million sq. Ft. Space under their management. Global investors like Blackstone and KKR are emerging as major investors in office assets which only goes on to cement their REIT-readiness.
REITs have also been raising debts at favourable rates from the market and reducing the overall cost of capital in the process. Considering that REITs offer almost twice as much post-tax returns as most other investments (like fixed deposits, Government bonds etc.), investment in these instruments is all the more compelling.
Similarly, IndiGrid, India’s second InvIT to list on the bourses, posted an impressive gain of 35% (Jan 2021-Jan 2022) vis-a-vis the Nifty50’s gain of 26% during the same period. It also posted a dividend yield of 8.23% accompanied by its industry peer IRB, the country’s first-listed InvIT, which posted a yield of 11.55% (TTM).
A Trusted Future
Both REITs and InvITs are playing important roles globally in financing capital-intensive, long-gestation infrastructure projects. The US alone accounts for 65% of the total market cap of REITs worldwide which is valued at $2.2trn.
In India, although their development is at a nascent stage, their debt-like asset stability and equity-like returns have become prospects too lucrative to ignore for investors who are looking to build on easy capital gains.
Moreover, after inglorious failures in the infrastructure sector (IL&FS etc.), perhaps it is time for Indian capital markets to look forward to alternate, hybrid and greener pastures. The institutional support for these instruments, though encouraging at the moment, merits more liberalisation to attract the large and untapped capital pool in the retail investment landscape.
(Originally published January 23rd 2022 in transfin.in)
