Real Estate: How do REITs and InvITs differ in terms of structure and benefits?

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are innovative financial instruments that have emerged as pivotal investment avenues in India. As the country seeks to modernise its infrastructure and boost real estate development, these trusts provide a structured way for investors to gain exposure to these sectors. This article aims to explain the meaning and benefits of REITs and InvITs, highlighting their relevance in the Indian investment landscape.

What are REITs and InvITs?

REITs are companies that own, operate, or finance income-producing real estate across a range of property sectors. They allow individual investors to earn a share of the income generated through commercial real estate ownership without having to buy, manage, or finance any properties directly. In India, REITs were introduced in 2014, and since then, they have gained traction among investors seeking exposure to real estate.

InvITs on the other hand, are similar investment vehicles focused on infrastructure projects. They allow investors to invest in a diversified portfolio of infrastructure assets, such as toll roads, power plants, and pipelines. InvITs were introduced in India in 2016 to attract long-term capital for infrastructure development.

Benefits of REITs

• Accessibility - REITs democratise real estate investment by allowing individuals to invest with relatively low capital. With a minimum investment often in the range of ₹10,000 to ₹15,000, anyone can participate in the real estate market.
• Liquidity - Unlike traditional real estate, which can take time to sell, REITs are traded on stock exchanges, offering liquidity to investors. This means investors can buy or sell their units at market prices, providing flexibility in managing their investments.
• Regular income - REITs are required to distribute at least 90% of their taxable income to unit holders as dividends. This can provide a steady income stream, making them attractive for income-focused investors.
• Diversification - Investing in a REIT allows individuals to gain exposure to a diversified portfolio of properties, reducing the risk associated with investing in a single property. This diversification can lead to more stable returns.
• Professional management - REITs are managed by experienced professionals who oversee property acquisitions, management, and financing. This expertise can lead to better decision-making and potentially higher returns for investors.

Benefits of InvITs

• Stable returns - InvITs typically invest in income-generating infrastructure projects, offering stable and predictable returns. This is particularly appealing in a volatile market, providing investors with a reliable income source.
• Long term investment horizon - Infrastructure projects often have long gestation periods but yield returns over time. InvITs attract long-term investors looking for capital appreciation and income.
• Tax efficiency - InvITs are structured to be tax-efficient, allowing investors to benefit from reduced tax rates on dividends. This can enhance overall returns compared to traditional investments.
• Low correlation with equity markets - Infrastructure investments typically have low correlation with the stock market. This means that during market downturns, InvITs can act as a stabilising factor in an investor’s portfolio.
• Support for national development - By investing in InvITs, individuals contribute to the development of critical infrastructure projects in the country, aligning their financial goals with national growth.

Differences Between REITs and InvITs

Although REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) share similarities as investment trusts, there are key distinctions that investors should consider:

• Structure - Both REITs and InvITs pool investor funds and have a trustee, sponsor, and manager. However, REITs focus on completed and income-generating real estate, requiring at least 80% of their assets to be in such properties, with a maximum of 20% in under-construction projects or related securities. InvITs invest in infrastructure projects like roads and power plants, also mandating 80% investment in completed, revenue-generating assets.
• Risks - REITs offer a diversified portfolio of properties, making them generally less risky compared to direct real estate investments. On the other hand, InVITs focus on infrastructure projects that can be exposed to a range of operational and regulatory challenges, which makes them inherently riskier investments.
• Minimum Investment - Previously, the minimum subscription amount for REITs was ₹50,000 and for InvITs, it was ₹1 lakh. However, this threshold has now been significantly lowered to ₹10,000 to ₹15,000 for both investment vehicles.
• Liquidity - REITs primarily focus on acquiring properties that yield consistent income, such as rental revenue. In contrast, InVITs target assets that generate cash flows through usage fees, tolls, or tariffs.
• Governance - REITs are regulated by the SEBI (Real Estate Investment Trusts) Regulations of 2014, while InVITs fall under the purview of the SEBI (Infrastructure Investment Trusts) Regulations, also established in 2014.

Conclusion

REITs and InvITs represent a transformative approach to investing in real estate and infrastructure in India. They offer numerous benefits, including accessibility, liquidity, stable returns, and professional management, making them attractive options for both retail and institutional investors.

As India continues to grow and urbanise, these investment vehicles will play a crucial role in mobilising capital for essential sectors, ultimately contributing to the nation’s economic development. For investors looking to diversify their portfolios while supporting India's infrastructure and real estate sectors, REITs and InvITs present a promising opportunity.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited