REITs and InvITs: Alternative Investment Options in India

Introduction: Own Real Estate Without Buying Property

“What if you could own a piece of premium office buildings or toll roads without crores of capital?”

REITs and InvITs make this possible. These instruments allow retail investors to participate in income-generating real estate and infrastructure assets—previously accessible only to large institutional investors or wealthy individuals. Let’s understand these increasingly popular investment options.

What Are REITs?

Definition

Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. It allows investors to invest in portfolios of real estate assets through publicly traded units.

Key Characteristics

How REITs Work

Investors → Buy REIT Units → REIT Owns Properties → Properties Generate Rent
                ↑                                              ↓
                ←──────── Distributions (90% of income) ←──────

Types of REITs

1. Equity REITs (Common in India)

• Own and operate real estate
• Income from rentals
• Value appreciation potential

2. Mortgage REITs (Not in India yet)

• Invest in mortgages
• Income from interest

3. Hybrid REITs

• Combination of both

What Are InvITs?

Definition

Infrastructure Investment Trust (InvIT) is a trust that owns and operates infrastructure assets, distributing most of the income to unit holders.

Key Characteristics

Types of InvITs

1. Listed InvITs

• Traded on stock exchanges
• Retail accessible
• Higher liquidity

2. Private/Unlisted InvITs

• Institutional investors only
• Higher minimum investment
• Lower liquidity

Infrastructure Sectors Covered

REITs in India

Listed REITs (as of 2024)

Typical REIT Portfolio

Embassy Office Parks (Example):

• Grade A office parks
• Major cities (Bangalore, Mumbai, Pune, NCR)
• MNC tenants
• 10+ million sq ft completed
• High occupancy (~90%)

REIT Yields

InvITs in India

Listed InvITs (as of 2024)

Typical InvIT Portfolio

India Grid Trust (Example):

• Power transmission lines
• 7,500+ ckm transmission lines
• Long-term PPAs
• Regulated tariffs

InvIT Yields

Comparison: REITs vs InvITs

When to Choose REITs

• Want real estate exposure without property ownership
• Prefer moderate yields with growth potential
• Comfortable with commercial real estate cycles

When to Choose InvITs

• Want higher current yield
• Prefer stable, regulated income streams
• Comfortable with infrastructure sector

Investment Mechanics

How to Invest

Primary Market:

• Apply during IPO/NFO
• Through broker/demat account
• Lot size varies

Secondary Market:

• Buy/sell on stock exchanges
• Like buying stocks
• Real-time pricing

Minimum Investment

Trading Details

• Trading hours: 9:15 AM - 3:30 PM
• Settlement: T+1 (like stocks)
• Available on BSE and NSE

Income and Distributions

Distribution Components

REITs/InvITs distribute:

1. Interest income (from SPV loans)
2. Dividend income (from SPVs)
3. Return of capital (repayment)

Distribution Frequency

• Typically quarterly
• Mandatory 90% distribution
• Record date announced in advance

Example Distribution

Hypothetical REIT Distribution (per unit):

Taxation

Distribution Taxation

Capital Gains

On Sale of Units:

Note: ROC reduces acquisition cost, potentially increasing capital gains on sale.

Tax Efficiency Comparison

Risks

Real Estate/Infrastructure Specific

1. Occupancy Risk (REITs)

• Tenants may leave
• Vacancy reduces income
• Renegotiation risk

2. Revenue Risk (InvITs)

• Traffic volumes (toll roads)
• Counterparty payment delays
• Regulatory changes

Market Risks

3. Interest Rate Risk

• Rising rates reduce appeal
• Increase borrowing costs
• May impact valuations

4. Liquidity Risk

• Trading volumes vary
• Large exits may impact price
• Smaller than equity markets

Structural Risks

5. Leverage Risk

• Debt increases volatility
• Refinancing risk
• Interest coverage concerns

6. Sponsor Risk

• Sponsor quality matters
• Conflict of interest potential
• Asset quality depends on sponsor

Sector-Specific Risks

REITs:

• Commercial real estate cycles
• Work-from-home impact
• Oversupply in markets

InvITs:

• Regulatory/tariff changes
• Traffic assumptions (roads)
• Technical/operational issues

Analyzing REITs and InvITs

Key Metrics

For REITs:

For InvITs:

Red Flags to Watch

• Declining occupancy/traffic
• High near-term lease expiries
• Rising vacancy
• Excessive leverage
• Concentrated tenant/asset base
• NAV declining

Portfolio Role

Asset Allocation Perspective

REITs/InvITs provide:

• Income generation
• Inflation hedge (partial)
• Real asset exposure
• Diversification from stocks/bonds

Suggested Allocation

Note: Already in real estate through direct property? Lower REIT allocation.

Comparison with Direct Property

Recent Developments

Market Growth

• REITs AUM: Growing from ₹70,000 crore+
• InvITs AUM: ₹1 lakh crore+
• Retail participation increasing

Regulatory Changes

SEBI Updates:

• Reduced minimum trading lot
• Enhanced disclosure requirements
• Simpler taxation structure
• SM REIT framework (smaller assets)

Upcoming Trends

• More REIT listings expected
• Residential REITs possible
• Data center REITs
• More InvIT sectors

Key Takeaways

1. REITs = Real estate exposure without property ownership
2. InvITs = Infrastructure assets with stable yields
3. 90% distribution mandatory—good for income seekers
4. Listed on exchanges – Easy to buy/sell
5. Tax complexity – Different components taxed differently
6. Lower than direct property entry point
7. Diversification benefit in portfolio

Disclaimer

This article is for educational purposes only. REITs and InvITs are subject to market and sector-specific risks. Past distributions don’t guarantee future payments. Read offer documents carefully. This is not investment advice.

Frequently Asked Questions

Q: Are REITs better than direct property investment? A: Different purposes. REITs offer liquidity, diversification, and professional management with low minimums. Direct property offers control, leverage benefits, and tangible ownership. Many investors hold both.

Q: How stable are REIT/InvIT distributions? A: Relatively stable but not guaranteed. REITs depend on rental income (tenant quality, occupancy). InvITs depend on asset performance (traffic, tariffs). Quality assets with long-term contracts are more stable.

Q: Can I invest through SIP? A: Not directly. You can accumulate units by buying regularly in the secondary market. Some platforms offer automated investment features.

Q: What happens if REIT/InvIT is delisted? A: Rare scenario. Regulations require sponsor to provide exit mechanism. Assets would be sold or converted to private structure with investor exit options.

Q: Are REITs/InvITs affected by interest rates? A: Yes. Rising rates increase borrowing costs and make other fixed income attractive, potentially reducing valuations. However, long-term contracts and rental escalations provide some protection.

REITs and InvITs are like fractional ownership of prime real estate and infrastructure—you get a share of the rent from that office building in BKC or the toll from that highway, without needing crores to buy the entire asset. They’re the democratization of institutional-grade real assets.