Demystifying REITs and InvITs: Purpose, Advantages, and Prospects

The best way to describe Real Estate Investment Trusts (REITs) is that they are like real estate mutual fund. Money is collected from investors, which is then pooled together and invested into real estate projects, which can encompass both fully developed projects as well as those that are still under construction. The profits from these projects, which are largely generated via rents paid by the tenants of the real estate projects, are then distributed to the investors in the form of dividends. Infrastructure Investment Trusts (InvITs) are very similar to REITs; the main difference is the assets they invest in. InvITs too, collect money from investors, pool the funds, and then invest them into infrastructure projects, that have longer duration periods, like road and highway projects, powerplants, warehouses, irrigation projects, and more. Profits from these infrastructure projects are distributed through interest, dividends, and capital appreciation.

REITs and InvITs are beneficial for the project developers as well as the investors. REITs and InvITs provide investors with an avenue to participate in the real estate and infrastructure space without assuming the elevated levels of risk and without the need for substantial capital typically associated with direct investments in these projects. It offers a method to expand their portfolio diversification and grants them a convenient entry into the realms of real estate and infrastructure. Typically, developers of such initiatives encounter challenges in securing funds, especially when they require last-minute funding. Banks have become increasingly cautious about extending credit to real estate and infrastructure projects, and consequently, many ongoing projects get stalled. REITs and InvITs provide an easy way for developers to raise funds. Furthermore, it also provides them an easy way to reduce assets on their balance sheet by facilitating the monetization of either a portion or the entire project, which in turn allows them to take on additional projects.

REITs and InvITs have experienced substantial growth as investment vehicles over the years. During the period from April to September, these instruments raised approximately INR 18,658 crores versus INR 734 crores as of March 31st, 2020. The number of AMCs investing in these instruments now stands at 18 versus 7 in 2020. The government and SEBI have also begun acknowledging the increasing significance of these financial instruments and are exploring ways to enhance their adoption. SEBI and mutual fund houses have broached the subject to introduce a dedicated category for REITs and InvITs. The real estate and infrastructure sectors are gaining growing prominence in India, and consequently, so are REITs and InvITs. The potential for these instruments is vast and yet to be fully exploited.

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