REITs or Real Estate Investment Trusts and InvITs or Infrastructure Investment Trusts are akin to mutual funds. REITs are instruments like a trust, that invests in real estate projects such as offices, malls, industrial parks, warehouses, hospitality, healthcare centres, and other assets thereby generating regular cash inflows on a periodic basis. On the other hand, InvITs are similar to REITs but differ on the fact that instead of Real Estate, they invest in infrastructural projects such as roads, highways, etc. Both REITs and InvITs are governed by the SEBI.
REITs and InvITs were first permitted in few years back but did not take off due to the ambiguity of tax treatment of pass-through payments. The recent clarification on the status of the same in case of REITs and InvITs, and also allowed the mutual funds and banks to invest through these instruments albeit subject to some predefined conditions.
What are REITs?
REITs channelise the funds from the investors or unitholders and invests them into completed or under construction real estate projects and hence these have a medium-term gestation period. The returns generated in the projects are then distributed as dividends to the investors. REITs are of three types-
- Equity REITs- These REITs are the ones through which investors own, renovate, manage, or sell the properties, as per their preference. The investments are generally in the official and industrial projects, residential projects, and hospitality projects.
- Mortgage REITs- These REITs are the ones where there is no owner but the funds are taken up against mortgages or debts to develop real estate projects or acquiring existing mortgage or mortgage back securities.
- Hybrid REITs- These REITs are the ones which include both equity as well as mortgage projects.
What are InvITs?
InvITs are instruments that channelise funds from investors to develop infrastructure projects to ensure cash flows. InvITs can invest either directly or through SPVs or Special Purpose Vehicles. These have a long-term gestation period. The dividends paid to the investors are usually the returns generated from the infrastructural projects. InvITs are of two types-
- InvITs that are publicly offered are invested in completed projects.
- InvITs that are privately offered are usually under construction projects.
InvITs can only invest through SPVs in case of public- private partnership projects.
REITs versus InvITs
- The income stability and certainty in the case of REITs is greater as around 80% of REIT assets have long term rental contracts that generates income whereas InvITs are dependent on factors such as daily capacity utilisation and scalability of tariffs which makes the cash flows less certain.
- Political or regulatory risks associated with REITs are less as compared to InvITs as REITs hold properties on a freehold or leases from the government whereas InvITs get concessions on infrastructural projects that are more affected by political and regulatory changes.
- REITs have ownership of the projects and it grows in value over time as all real estate projects do. These also have a high terminal value. Since InvITs comprise properties that get concessions where the projects are up for rebid or are returned back to the authorities post concession period.
- REITs has a larger transparency of growth due to the redevelopment of existing assets, acquisition of completed or leased out assets, and also new construction of properties whereas the growth of InvITs are dependent on the concession successfully acquired through a bidding process.
- REITs has higher liquidity due to it being accessible to small investors and a lower unit price and trading batches whereas InVITs has bigger size of trading batches and hence poor liquidity.
- REITs have a requirement of Rs. 50,000 as a minimum subscription for investment whereas InvITs have the same for Rs. 1,00,000.
Benefits of investing in REITs or InvITs
Although both REITs and InvITs are similar but they differ in the assets they invest in; they provide benefits to both the investors and project developers.
Most real estate and infrastructure projects have less scope for liquidity which makes entry and exit into them difficult. Developers can monetize either part or the entire project under REITs and InvITs thereby getting a viable exit route.
REITs and InvITs provides the developers an opportunity to convert their asset-heavy models into asset-light models.
Developers and infrastructure project owners gets an avenue for an additional source of funding via REITs and InvITs. This also provides a long-term funding source and does not impose the burden of bank funding, thereby helping with the financial viability of the projects.
REITs and InvITs are like DEMAT accounts for investors as they can invest in and gain from real estate market without actually owning any property. REITs are usually required to distribute most of their earnings to investors thereby making it a good source of safe and regular income.
Long term institutional investors like insurance companies and pension funds, REITs and InvITs offers them a good low-risk option. As InvITs invests in long gestation assets, it helps long term liabilities to be better matched.
REITs and InvITs are important from a macroeconomic perspective as it generate funds for projects without straining the government finances and as infrastructure has a multiplier effect on GDP as well as industrial growth, it adds to the benefits of having these instruments as viable investment options.