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To say that India’s recovery and resurgence in the post-pandemic landscape will depend heavily on the state of its infrastructure and real estate will not be an overstatement. A well-developed national infrastructure, after all, attracts investments from private and public institutions, both local and overseas, and paves the way for accelerated economic growth. The real estate sector has also consistently contributed between 6-7 percent to the country’s GDP and, by 2025, is expected to double this figure to 13 percent.
But, despite their undeniable potential to accelerate the Indian economy’s growth trajectory, the two sectors are yet to receive due attention with respect to public funding.
With investment tools such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) gaining momentum and acceptance, large-scale infrastructure and institutional real estate projects have a new, lucrative avenue that provides access to capital.
The structures and mechanisms: Understanding how REITs and InvITs work
Investment in real estate for most people is limited to plots of land or apartments. Residential apartment investments have not yielded well compared to investment in Grade A commercial buildings due to lower rentals in comparison to the commercial assets. But investing in commercial real estate is not an easy task as it requires a lot of investment. So how can an average investor grab a pie of commercial realty?
REITs and InvITs function like mutual funds that invest the money collected from investors or unit holders into real estate and infrastructure projects. Investors can buy and sell units in publicly traded REITs and InvITs to earn a profit. It is a fractional ownership with good returns outside of the volatility of stock market and low interest rates on fixed deposits. Fractional investment is a new, less-risky and convenient way to pocket-friendly investment in office real estate through which several investors, pool in their money, to buy a Grade A office property jointly. The investors receive rental income in proportion to investments made in the property. Capital appreciation attained at the time of sale, is also shared among the investors based on the same criteria.
Investors can choose from two types of REITs: equity and mortgage. Equity REITs generate income when property owners lease spaces like residential townships, office areas, and shopping malls. Mortgage REITs, on the other hand, generate income from interest paid on investments made in mortgages, mortgage-backed securities, and related assets. Returns generated from both instruments are distributed among investors as dividends.
InvITs are a variation of REITs that only invest in infrastructure developments such as highway and road projects, water resource management projects, power grids, etc. While there are two types of InvITs – those that invest in revenue-generating finished projects and those that invest in projects under construction – only the former tends to invite investors through a public offering.
The history of REITs and InvITs in India – and their future trajectory
In 2014, the Indian government and the Securities and Exchange Board of India (SEBI) took a giant step towards addressing the funding bottleneck in the real estate and infrastructure spaces: the introduction of a regulatory framework to establish and operate Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) in the country. Within three years, India’s first InvIT – the IRB InvIT Fund – was open for subscription.
Sponsored by IRB Infrastructure Developers, the country’s largest private toll roads and highways infrastructure developer, the launch of the IRB InvIT Fund was an instant success. Marquee global investors such as the Monetary Authority of Singapore and the United Kingdom’s National Westminster Bank featured amongst its anchor investors, the InvIT raised almost 50 percent of its target of Rs 4,655 crore before it even opened its public offering.
This was followed in 2019, with the launch of the country’s first listed REIT by Bangalore-based real estate developer Embassy Office Parks – a development that has been hailed as a game-changer in the real estate space. Because, up until that point, investing in realty, especially in the high-growth commercial real estate segment, had been financially unviable for most retail investors. REITs addressed this gap by providing a mechanism for them to band together with institutional and other retail investors, to infuse capital in various real estate projects without owning them entirely.
The result: Embassy Office Parks REIT outperformed stocks from the realty sector, despite a general slowdown in the economy. Blackstone and Brookfield also announced the two biggest deals in Indian real estate, amid the pandemic, amounting to around Rs 25,000 cr, acquiring office parks from Prestige and RMZ respectively. In fact, the recent Brookfield REIT listing was oversubscribed by a whopping 8 times.
The National Highway Authority of India is preparing to launch the country’s first government-sponsored InvIT in March 2021. Around six road assets, worth Rs 5,000 crore, have reportedly received in-principal approval for being transferred to the InvIT.
Unlocking advantage: Delivering real benefits to retail and institutional investors
One of the most important advantages of investing in instruments such as REITs and InvITs is that investors are guaranteed to earn a dividend. The structures for both are governed and regulated by SEBI, with detailed guidelines for the public issue of units. Both are set up as trusts registered with the regulator and must have trustees, sponsors, and managers. SEBI rules also mandate REITs and InvITs to allocate 90 percent of their income as dividends to their investors. The Embassy Office Parks REIT, for example, distributed dividends between Rs 23.9 to Rs 24 per unit in 2020, despite the challenges posed by the COVID-19 pandemic.
Another advantage of investing in these instruments is a high degree of transparency. Any REIT or InvIT is required to appoint a specialized management and disclose its capital portfolio annually. This helps investors get a clear picture of the potential of an InvIT or REIT and invest accordingly. It also eliminates the risk of fraud or financial scam impacting their investment. The risk borne by investors is further lessened as they get to invest in a diversified portfolio, for both real estate and infrastructure. Furthermore, as funds are highly liquid, investors can quickly and easily buy and sell units for better access to liquidity as per their needs.
Over the years, the government has introduced norms that can potentially make REITs and InvITs more attractive to retail investors. In 2019, for example, SEBI reduced the minimum subscription requirement for REITs and InvITs to Rs 50,000 and Rs 1 lakh, respectively. More recently, in Budget 2021-22, Finance Minister Nirmala Sitharaman announced that dividend payments on REITs and InvITs will now be exempted from Tax Deducted at Source (TDS) and that the advance tax liability on dividend income will only arise once the dividend is declared. The FM also enabled REITs and InvITs to raise debt funds from foreign portfolio investors (FPIs), thereby improving their access to liquidity, and announced tax-related relaxations for FPIs.
This brings us to another key advantage of these instruments: retail consumers will benefit from the increasing interest of smart money (banks, mutual funds, and FPIs) in REITs and InvITs. Mutual fund investments in REITs jumped six-fold year-on-year to Rs 3,972 crore in 2020, while InvITs secured Rs 9,138 crore in investments from mutual funds. And, with realty players such as DLF and Godrej working to launch their REITs, the interest in these instruments – both from an investment perspective and from the financial gains generated by institutional funding – will only rise in the coming years.
With the recent government push for affordable housing, real estate has shown tremendous potential for recovery from the slowdown that has destabilized it over the past few years. Its recovery has been buoyed, despite the shock caused by the pandemic, by increased investments and policy interventions aimed at boosting revenue, enhancing transparency, and supporting growth. The government’s announcement to increase infrastructure spending by 26 percent in FY22 also bodes well for the sector, the economy, and overall employment, suggesting that these two sectors stand on the precipice of tremendous growth. These developments suggest that the time is right for retail and institutional investors to invest their capital in REITs and InvITs – not only to reap the financial dividends but to also contribute towards creating greater value for the economy.
The author, Amit Agarwal, is Co-Founder and CEO at NoBroker.com
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