Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are relatively new investment instruments in India with only 6 of them listed on the exchanges. So far REITs and InvITs were not eligible to be part of Nifty indices but now with revision in rules, all REITs and InvITs that are listed and traded at the NSE are eligible for inclusion. The inclusion of REITs and InvITs in indices would bring in more visibility resulting in wider investor participation in them. Recently NSE had also reduced the lot size to single unit from the earlier size ranging from 100 to 2,500 and now with inclusion in indices, the volumes will increase subsequently which could lead to better price discovery. It would attract more retail investors and could result in more ETF flows for these instruments.
REITs are investment trusts that own and operate real estate properties generating regular income and capital appreciation on their investments. They pool funds from investors offering them a liquid way of entering the real estate market while helping them diversify their portfolio and earn regular income plus long-term capital appreciation. On the other hand, InvITs pool money from investors that own and operate operational infrastructure assets like highways, roads, pipelines, warehouses, power plants, etc. They offer regular income (via dividends) and long-term capital appreciation.
Both REITs and InvITs are low risk investments as they have to compulsory invest atleast 80 percent of their assets in completed and income generating projects. Further at least 90 percent of the income earned by them has to be distributed to its unit holders. Thus they offer attractive yields with minimal risk. Listing of REIT is mandatory and till now three REITs have been listed - Embassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust. However, unlike REITs, SEBI regulations also allow private and unlisted InvITs. The three listed InvITs include - India Grid Trust, IRB Invit Fund, Powergrid Infrastructure Investment Trust.
REITs have seen a strong rental collection of over 99 percent in Q1 FY22, though their overall vacancy levels have increased marginally on sequential basis. Continued work-from-home due to the second wave of Covid-19 infections has led occupiers delay leasing decisions, leading to increased vacancy levels. This trend may reverse from H2 FY22 as the real estate market revives with opening up of the economy, but third Covid wave and rise in global interest rate does pose a risk.
On the other hand, the government is laying emphasis on infrastructure development to aid economic growth and job creation. InvITs allow investors to participate in revenue-generating real infrastructure assets such as roads, bridges, power grids, without getting exposed to high risk of owning them. Therefore both these investing tools offer investors an avenue to participate in the capex revival theme with minimal risk exposure.