Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) were introduced in the US during the 1960s and given a nod to be launched in India by the Securities and Exchange Board of India (SEBI) in 2014. Since these instruments are new in the Indian investment landscape, there is a lot of uncertainty regarding their efficacy and benefits. Let’s find out what they are and how they differ from each other.
Real Estate Investment Trusts or REITs are investment trusts (like mutual funds) 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.
Infrastructure Investment Trusts or InvITs are also like mutual funds that 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.
While real estate and infrastructure investments can be called ‘first cousins’ in the investing world, there are several differences that investors must be aware of before making the decision of buying them. Here is a detailed look at how REITs and InvITs differ from each other:
Structurally, a REIT and InvIT are very similar. They are investment trusts that pool money from investors and have a trustee, sponsor, and manager.
REITs invest in completed and under-construction real estate projects. They have to ensure that at least 80% of the assets are invested in completed and income-generating properties.
Further, they cannot invest more than 20% of the assets in under-construction properties or debt instruments of a real estate company or shares of listed companies deriving an operating income of less than 75% from real estate activities/government securities/money market instruments.
InvITs, on the other hand, invest in infrastructure projects pertaining to roads, power plants, highways, warehouses, etc.
They have to ensure that at least 80% of the assets are invested in completed and revenue-generating infrastructure project(s). Further, they cannot invest more than 20% of their assets in other eligible investments.
InvITs must also ensure that investments in under-construction projects, a debt of companies from the infrastructure sector, listed equity shares of companies not having less than 80% of their income from the infrastructure sector/government securities/money market instruments, cannot exceed 10% of the InvIT’s value.
REITs own real estate properties and generate revenue by leasing, renting, or selling them. SEBI mandates them to invest at least 80% of their investable assets in developed and income-generating properties.
Currently, REITs are allowed to invest only in commercial real estate properties and NOT residential ones. Further, they need to distribute 90% of their income to investors in the form of dividends. If the REIT decides to sell a property, then it can choose to reinvest the sale proceeds into another property or distribute 90% to unitholders.
InvITs hold infrastructure assets that are operational and income-generating like gas pipelines, roads, power transmission lines, etc. These trusts have long-term contracts with strong parties ensuring a steady stream of revenue.
They also need to distribute 90% of their net distribution cash flow to investors. If the InvIT decides to sell an asset, then it can choose to reinvest the sale proceeds into another infrastructure project or distribute 90% to unitholders.
If we compare the stability and revenue generation, REITs are more stable since 80% of their assets are invested in income-generating assets with rental contracts that ensure a steady income.
On the other hand, the cash flows of InvITs depend on a lot of factors that can affect their capacity utilization. Also, the restrictions on tariff scalability can hamper their efforts to ensure sustainable growth.
REITs are of two types – publicly traded and non-traded. The risks are different for each of them.
InvITs are yet to garner investor attention due to certain risks highlighted by the existing ones.
According to SEBI’s Circular dated April 23, 2019 [SEBI/HO/DDHS/DDHS/CIR/P/2019/59], the minimum investment guidelines are as follows:
While both REITs and InvITs are traded over the stock exchange, REITs are more liquid since they have a lower unit price compared to InvITs. Also, more familiarity with the real estate sector as compared to infrastructure makes it an attractive option to retail investors.
When a REIT grows, investors can see the growth as the company will undertake redevelopment of its existing assets, start new construction, or acquire new assets. On the other hand, the growth of an InvIT can be understood only by looking at its books since it depends upon how the company acquires concession assets via a bidding process.
While REITs and InvITs are new in the investment landscape in India, there are many international markets like the USA, Singapore, Japan, etc. that can help investors understand how they tend to perform during specific economic cycles. Most importantly, we urge investors to spend some time trying to understand these avenues before investing.