The capital market regulator, in its board meeting held in Mumbai recently, by amending the “SEBI (Infrastructure Investment Trusts) Regulations, 2014” and “SEBI (Real Estate Investment Trusts) Regulations, 2014” opened up REITs and InvITs investing to a large section of investors.
This comes at a time when retail inflation (measured by the Consumer Price Index) has inched up to 6.3% in May 2021, clearly out of the comfort zone of RBI and the low interest rates offered on some of the traditional fixed income instruments have made it quite unsettling for conservative investors – they are unable to clock a positive real return (also known as inflation-adjusted returns). The Low interest rates and comfortable liquidity conditions are also the primary reasons for the stretched valuations and Indian equity market to escalate high.
By relaxing the minimum investment amount and trading lot size for publicly held REITs and InvITs, the capital market regulator has opened the doors wide to more investors, enabling them to earn a stable income but with a fair share of risks too.
What are REITs and InvITs?
REITs or InvITs are entities that invest in rent-yielding assets and payout dividends to their investors.
REITs own and then lease out real estate, whether commercial or residential. Investors are given units, similar to those in a mutual fund scheme. Units of the REITs are traded on exchanges and provide the investor with an option to exit, provided there are buyers available.
In India, currently, there are three REITs listed on the bourses: Mindspace Business Parks, Embassy Office Parks, and Brookfield India Real Estate Trust. Global real estate services firms expect India’s REIT market to grow exponentially over the years, and thus more REITs would be listed.
Speaking about InvITs, they function similarly, except that they own infrastructure companies (power generation, telecommunications, road construction etc.) instead of real estate. The sponsor sets up the InvIT, which in turn invests into the eligible infrastructure projects either directly or indirectly, i.e. via a Special Purpose Vehicle (SPV). The regulations require 90% of the net distributable cash flows to be distributed to the unitholders.
What decisions has SEBI taken?
The capital market regulator has decided to lower the minimum application value in REITs and InvITs in the range of Rs 10,000 to Rs 15,000-more or less at par with the minimum investment amount applicable to equity Initial Public Offers (IPOs). Earlier, the minimum application to invest in the IPO of a REIT was Rs 50,000, and Rs 1 lakh in the case of InvIT.
It’s noteworthy that this is the second revision in the minimum application amount. In 2019, the market regulator had slashed the minimum investment limit applicable to REITs from Rs 2 lakh to Rs 50,000.
Now, the lot size has also been reduced from 200 to 1 for trading on stock exchanges.
Furthermore, the capital market regulator has introduced the minimum unit holders’ requirement for unlisted InvITs. As per the amendments to “SEBI (Infrastructure Investment Trusts) Regulations, 2014”, there shall be at least 5 investors, other than sponsors, its related parties and its associates. They together should hold at least 25% of the unit capital of InvIT.
By making these amendments, the regulator has attempted to create an enabling environment conducive for the growth of REITs and InvITs, wherein liquidity would improve and greater participation from investors may be seen.
At present, three REITs and eight InvITs together have managed assets approximately worth Rs 2 lakh crore.
Table 1: Existing InvITs and REITs
|IRB InvIT Fund
|India Grid Trust
|India Infrastructure Trust
|Embassy Office Parks REIT
|Commercial Real Estate
|IRB Infrastructure Trust
|Mindspaces Business Parks REIT
|Commercial Real Estate
|Tower Infrastructure Trust
|Brookfield India Real Estate Trust
|Commercial Real Estate
|Power Grid Infrastructure Investment Trust
As outlined by the National Infrastructure Pipeline (NIP), India endeavours to invest Rs 111 lakh crore (for over 7,500 investible projects) in infrastructure development by 2025.
In the future, infrastructure assets predominantly in telecom, commercial real estate, power transmission and renewable energy will be offered to the investors.
Given the budgetary constraints, promoting other investment options such as InvITs and REITs is inevitable. India is going to see a boom of REITs and InvITs in the next 5 years. According to a report by CRISIL, REITs and INvITs can potentially raise Rs 8 lakh crore over the next five fiscal years-which is a 4X growth from the current level of AUM being managed.
Excited? Remember this before you invest in REITs and InvITs…
REITs and InvITs are structured to help the infrastructure developers/investors free up their capital for future projects. As an investor, you enjoy the cash flows/income generated from the assets offered through REITs and InvITs. For example, a telecom tower InvIT will distribute rents earned from telecom operators among its unitholders.
Keep in mind, the primary motive of these investment avenues is to generate income and not earn capital gains. Nonetheless, making capital gains is possible depending on the underlying asset profile.
If you are investing in InvITs, you need to understand the risks involved in them, which includes but not limited to…
- The risk of overestimation of asset’s income generation capacity for a given period
- The risk of litigations with various authorities
- Credit risk, which could prove fatal for InvITs since lenders to them can invoke SARFAESI Act provisions against them
- Cash flow stability
Therefore, it is necessary that you stick to only AAA-rated REITs and InvITs. Mind you, units aren’t rated, debt on the books of InvIT and REIT would be.
Also, take into consideration the corporate profile and market standing of the sponsor. Stability in cash flow matters a lot since it directly affects your income. For instance, if a REIT doesn’t see optimum occupancy post-pandemic or loses its negotiating power with its customers, then it would earn a lower distributable surplus. As against that, an InvIT of power transmission assets will have relatively stable earnings and distributable surplus.
If you decide to invest in REITs and InvITs, your investments should be well aligned with your financial goals and risk appetite. You should always prefer listed REITs and InvITs, they offer you better transparency. And don’t forget the dividends earned from REITs and InvITs are included in your total taxable income and taxed as per the slab applicable to you.
This article first appeared on PersonalFN here