What are InvITs?
Infrastructure investment trusts are investment instruments that work like mutual funds and are regulated by the Securities and Exchange Board of India. Abbreviated as InvITs, their units are listed on different trading platforms like stock exchanges and are a wholesome combination of both equity and debt instruments.
The primary objective of InvITs is to promote the infrastructure sector of India by encouraging more individuals to invest in it and can be modified according to a given situation. Typically, such a tool is designed to pool money from several investors to be invested in income-generating assets. The cash flow thus generated is distributed among investors as dividend income. When compared to Real Estate Investment Trust or REITs, the structure and operation of both are quite similar.
Types of InvITs
Through InvITs, individuals can park their funds into infrastructure projects in two ways, i.e. either directly or through particular purpose vehicles, thus classifying them in two different types.
- Investment in revenue-generating finished projects –
One of the types allows investment in revenue-generating finished projects and tends to invite investors through a public offering.
- Investment in projects under construction –
Additionally, investors are also allowed to invest in projects that are under construction or have been finished. Notably, this type opts for a private placement of its units.
Structure of InvITs in India
An InvIT is established as a trust and is registered with the SEBI. Typically, infrastructure investment trust SEBI comprises 4 elements, namely –
- Trustee:They are required to be registered with SEBI as debenture trustees. Also, they are required to invest at least 80% into infra assets that generate steady revenue.
- Sponsor: Typically, a body corporate, LLP, promoter or a company with a net worth of at least Rs. 100 crore classifies as a sponsor. Further, they must hold at least 15% of the total InvITs with a minimum lock-in period of 3 years or as notified by any regulatory requirement. When it comes to a public-private partnership or PPP projects, sponsors serve as a Special Purpose Vehicle (SPV).
- Investment manager: As a body corporate of LLP, an investment manager supervises all the operational activities surrounding InvITs.
- Project manager: The authority is mostly responsible for executing projects. However, in the case of PPP projects, it serves as an entity that also supervises ancillary responsibilities.
The table below highlights the structure of infrastructure investment trust.
|Trustee||Invest a minimum of 80% in infra assets.|
|Sponsor/s||Holds 15% of the total InvITs.|
|Investment manager||Manages investment and supervises operational activities concerning InvIT.|
|Project manager||Executes projects.|
What is the Purpose of InvITs?
The purpose of InvITs is to enable Infrastructure Companies to repay their debt obligation quickly and effectively. Since infrastructure-oriented projects tend to take time to generate substantial cash flow, InvITs come in handy for paying off loan interests and other expenses conveniently.
What are the Advantages of InvITs?
Though InvITs were regarded as one of the most expensive investment avenues previously, they tend to offer several benefits to investors.
The following highlights the most prominent benefits of infrastructure trusts in general.
InvITs with multiple assets offer individuals an opportunity to diversify their investment portfolio. Such a feature directly helps lower associated risks and further allows investors to generate steady returns in the long run.
- Accrues fixed income
The option to redistribute risks and accrue a fixed income serves as a potent alternative for generating fixed income, especially for retirees. Also, including such an investment tool would help those who intend to plan retirement effectively.
Generally, it is easy to enter or exit from infrastructure investment trust, which directly enhances their liquidity aspect. However, small investors may find it challenging to sell a high-valued property quickly.
- Quality asset management
InvITs offers investors the opportunity to get their assets managed professionally. It not only ensures effective management and allocation of resources but also helps to prevent fragmentation of holdings.
Nevertheless, the pointers below help to understand how different elements tend to benefit by investing in an infrastructure investment trust.
Parking funds into this investment option allows investors to generate fixed returns on the same. For instance, an infrastructure investment trust has to distribute 90% of its total net cash flow to its investors. It means that investors can generate steady earnings throughout the course of investment.
Additionally, investors also receive dividend income on their investment in case the InvITs have surplus cash flow.
By investing in InvITs, promoters would be able to lower their debt burden significantly via an asset sale. Further, promoters can use the proceeds to reinvest in other portfolio projects.
What are the Disadvantages of InvITs?
Although investors can benefit in several ways by parking their funds in InvITs, they are exposed to certain drawbacks as well. Consequently, to make the most of such an investing option, individuals should weigh the pros and cons beforehand to streamline the process effectively.
For instance, the following highlights the significant drawbacks of this investment tool.
- Regulatory risk
Even the slightest change in the regulatory framework like taxation or policies concerning the infrastructure sector would have a ripple effect on InvITs.
- Inflation risk
A high rate of inflation has a significant impact on the performance of infrastructure investment trusts. For instance, inflation may increase the sector’s operating cost. Further, an increase in the toll rates would lower the prospect of generating substantial returns.
- Asset risk
Typically, investment in infrastructure has a long gestation period, and hence the process of generating returns is often delayed. Such a delay not only takes a toll on the cash flow but further hampers profit projections.
Who Should Invest in InvITs?
Like stocks, InvITs are also listed on exchanges through IPO. However, a minimum amount required to invest in such an IPO is Rs. 10 lakh. Notably, small investors may struggle a little if they intend to invest directly in InvITs through IPO. Regardless, high net worth institutions, individuals, etc. tend to find infrastructure investment trust a profitable investment option due to their capacity to invest and its return prospects.
Prospects of InvITs in India
It is anticipated that investment in InvITs in India has a promising future and may prove beneficial in these following ways.
- Existing projects would be provided with substantial refinancing options in the long run.
- It would help disengage developer’s capital to facilitate reinvestment towards new infrastructure projects.
- It is expected to facilitate the refinancing of current debt with cost-effective capital for the long term.
- It would encourage international investors to invest in the Indian infrastructure sector.
- Prospects of increasing opportunity to diversify an investment portfolio with the help of quality infrastructure assets remain.
InvIT VS REIT
Most investors consider InvITs and REITS to be similar investment options. Though they share some common features, several factors separate the two.
To begin with, infrastructure investment trust is planned to pool money from investors to invest it in assets generating cash flow. Moreover, they invest in projects like roadways, highways and other high-value infrastructural units.
Conversely, REIT serves as an investment tool that helps own and operate income-generating real estate properties. Such properties serve as a stream of annual revenue and mostly include warehouses, healthcare centres, commercial buildings, malls, etc.
The pointers below elaborate the differences between the two in detail.
Compared to REITS, InvITs are more liquid. Such a point of difference arises from the fact that InvITs come with a large trading lot size, which is often not feasible for small investors. On the other hand, the lower unit price and trading size of REITs make it a viable option for small investors.
- Income stability
The stability of income for InvITs depends mainly on those factors that tend to affect the capacity of usage and also the scalability of tariffs. Hence, in most cases, income is quite uncertain. When compared to InvITs, REITs tend to provide a steady flow of income mostly because their income yielding properties come with extensive rental contracts.
- Growth prospect
When it comes to InvITs, their growth prospect depends mainly on the success of acquisition and concession of assets. Whereas, the growth prospects of REITs rely on the redevelopment or acquisition of assets, new construction, etc.
Read more here: Difference Between REITs and INVITs
- Associated risks
The infrastructure sector is prone to react to regulatory policies and political interference. Thus, parking funds in infrastructure investment trusts often prove risky. On the other hand, REITs tend to hold properties that are either leased or owned on a freehold basis.
Lastly, it can be said that before planning to invest in an infrastructure investment trust, one should assess the pros and cons of the same carefully. Additionally, they should factor in things like their investment capability, investment horizon, risk appetite, etc. to create a suitable investment portfolio.