Revolutionizing Investment: SEBI's Vision for REITs and InvITs in India

In the dynamic landscape of India's financial markets, a revolutionary evolution is underway with the introduction of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). These innovative financial instruments have emerged as transformative vehicles, offering investors unique opportunities to participate in the real estate and infrastructure sectors. At the helm of this financial revolution is the Securities and Exchange Board of India (SEBI), which envisions a future where REITs and InvITs play a central role in shaping the country's investment landscape. In this blog, we embark on a journey to unravel the intricacies of REITs and InvITs, exploring SEBI's visionary perspective and its strategic vision for these investment avenues in the Indian market. 

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) originated in the US during the 1960s and got approval for launch in India from the Securities and Exchange Board of India (SEBI) in 2014. As these investment options are relatively new in India, there's a lot of confusion about how effective they are and what benefits they offer. 

What are REITs? 

REITs, which stands for Real Estate Investment Trusts, are like companies that own and run real estate to make money. These companies take care of important real estate properties and mortgages, managing things like renting out properties and collecting rent. The money they collect from rent is then shared among the people who own shares in the company, giving them income and dividends. 

REITs give investors a chance to own expensive real estate and make money from dividends, which can grow their overall investment over time. This means investors can see their money increase while also earning some extra income. 

Anyone, whether they have a lot or a little money, can put their funds into this investment choice and gain advantages based on what they invest. Even if you don't have sufficient money, you can team up with other investors to invest in big projects like large commercial real estate. The properties in REITs can be all sorts of things, like data centres, infrastructure, healthcare places, apartments, and more. 

Types of REITS? 

Looking at the bigger picture, the kinds of businesses that REITs are part of and how they sell and buy shares can help us understand and group them better. 

The following is a list of the different types of REITs. 

• Publicly Traded REITS. 
  Real estate investment trusts (REITs) that are publicly traded offer shares that are listed on the National Securities Exchange and are regulated by SEBI. People like you and me can buy and sell these shares through the NSE. 

• Private REITS. 
  These trusts work like private offerings, meaning they are only available to a specific group of investors. Usually, these private REITs are not bought and sold on big stock exchanges like the NSE, and they are not officially registered with SEBI. 

• Public non-Traded REITS 
  These are REITs that are not listed for everyone to buy on the National Stock Exchange but are still approved by SEBI. Unlike the ones available to the public, these are not as easy to buy or sell quickly. However, they are steadier because they aren't influenced by changes in the market. 

• Hybrid 
  This option allows investors to diversify their portfolio by parking their funds in both mortgage REITs and equity REITs. Hence, both rent and interest are the sources of income for this particular kind of REIT. 

• Mortgage 
  Also known as mREITs, it is mostly involved with lending money to proprietors and extending mortgage facilities. Further, REITs tend to acquire mortgage-backed securities. Mortgage REITs also generate income in the form of interest accrued on the money they lend to proprietors. 

• Equity. 
  This type of REIT is among the most popular ones. Typically, it is concerned with operating and managing income-generating commercial properties. Notably, the common source of income here is rent. 

Down are the examples of REITs, 

• Brookfield India Real Estate Trust. 

• Embassy Office Parks REIT. 

• Mindspace Business Parks REIT. 

• Nexus Select Trust. 

What are INVits? 

Infrastructure Investment Trusts, or InvITs for short, have their parts (units) listed on various trading platforms like stock exchanges. They're like a mix of both owning a piece of the project and lending money to it. 

InvITs aim to boost India's infrastructure sector by motivating more people to invest in it. This goal may be adjusted as needed. 

Usually, this tool is created to collect money from many people and invest it in things that make money. The money made is then shared among the investors as income, like a reward. If you compare it to Real Estate Investment Trusts (REITs), both work in pretty much the same way. 

Types of INVits? 

With InvITs, people can invest their money in infrastructure projects in two ways—either directly or through special-purpose vehicles. This puts them into two different categories. 

• 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. 

• Investments 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. 

Down below are some of the examples of INVits, 

• Anzen India Energy Yield Plus Trust 

• Athaang Infrastructure Trust 

• Bharat Highways InvIT 

• Cube Highways Trust 

Difference between REITs and INVits. 

Real estate and infrastructure investments are like close relatives in the investing world, but there are important differences that investors should know before deciding to buy them. Let's take a closer look at how REITs and InvITs are not the same. 

• Structure - REITs and InvITs are kind of like teams that gather money with a trustee, sponsor, and manager. 

For REITs, most of their money goes into completed real estate projects. They need to put at least 80% into properties that are finished and make money. But they can't put more than 20% into projects that are still under construction or into debts of real estate companies or shares of listed companies that don't make at least 75% of their money from real estate. 

Now, InvITs are into different projects like roads, power plants, highways, and warehouses. They follow a similar rule – at least 80% of their money goes into completed infrastructure projects that are making money. And just like REITs, they can't put more than 20% into other types of investments. 
Also, there's a rule for InvITs that says they can't put more than 10% into things like projects that are still being built, debts of companies in the infrastructure sector, or shares of listed companies that don't make at least 80% of their money from infrastructure. 

• Revenue Generation and Stability - REITs own properties and make money by renting, leasing, or selling them. SEBI says they have to put at least 80% of their money into properties that are already built and making money. 

Right now, REITs can only invest in commercial properties, not homes. They must give 90% of the money they make to investors as dividends. If they sell a property, they can either buy another one with the money or give 90% of it to the people who own units in the REIT. 

Now, InvITs own things like gas pipelines, roads, and power lines that are already making money. They have long-term contracts with strong parties to make sure they keep getting money. 

Just like REITs, they must give 90% of the money they make to investors. If they sell something, they can either buy another infrastructure project with the money or give 90% of it to the people who own units in the InvIT. 

When it comes to stability and making money, REITs are seen as more stable because 80% of their money is in properties that make a steady income through things like rental contracts. 

On the other hand, InvITs' money depends on many things that can affect how much they can use their resources. Also, some rules can make it hard for them to grow sustainably

• Risks - REITs are of two types – publicly traded and non-traded. The risks are different for each of them.  

  • For non-traded REITs, people who invest in them might find it hard to know how much their investment is worth. They have to trust the REIT to make sure they get good returns. Also, these investments are not easy to turn into cash quickly, and sometimes there's a time when you can't touch the money at all. Lastly, many non-traded REITs ask for a fee upfront, and that can take away from the overall money you make. 

  •  Now, for publicly traded REITs, the biggest risk is when interest rates go up. In more established markets like the US, when interest rates rise, people sell their REIT investments and choose safer ones.  

• InvITs are yet to garner investor attention due to certain risks highlighted by the existing ones. 

  • Investors don't always know exactly how much the projects are worth. Even if the company provides a report saying how much money they think the infrastructure will make, it's just a guess or prediction. 

  • Investors take on the chance that the project might not work out. For example, if the trust invests in a road project and makes money from tolls, it estimates how much traffic will use the road. But if that prediction doesn't happen or if the government builds another road without tolls, the project might not succeed, and the investors might get very little or no money back. 

  • InvITs face risks related to politics or rules. Many of these trusts get special permissions from the government for their infrastructure projects. If there's a change in the rules or policies, these special permissions might be taken away, making it hard for the trust to make a profit. 

• Minimum Investment - According to SEBI’s Circular dated April 23, 2019 [SEBI/HO/DDHS/DDHS/CIR/P/2019/59], the minimum investment guidelines are as follows: 

  • REIT – The value of each allotment lot shall not be less than Rs.50000 with each lot consisting of 100 units. 

  • InvIT – The value of each allotment lot shall not be less than Rs.1 lakh with each lot consisting of 100 units. 
     

• Liquidity - Even though both REITs and InvITs are bought and sold on the stock exchange, REITs are easier to turn into cash because they have a lower unit price compared to InvITs. People also find real estate more familiar than infrastructure, making REITs a more appealing choice for regular investors. 

• Growth - 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. 

SEBI’s Vision for the Future. 

At the CII Global Economic Policy Summit, Madhabi Puri Buch, the Chairperson of SEBI, talked about making India's corporate bond market more attractive to global investors. She wants to use Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to double the value of listed companies' infrastructure, currently at Rs 300 lakh crore, potentially adding another Rs 300 lakh crore to the market. SEBI, under Buch's leadership, is putting a strong focus on REITs and InvITs, aiming for a combined value of Rs 300 lakh crore. 

You may also like: Is India's corporate bond market getting a makeover?

Buch believes there are untapped opportunities in India's corporate bond market, making it a promising place for global investment. Recent data shows that a significant amount of bank-raised debt in India now comes from bonds and REITs, showing a growing interest in these investment options. 

She also thinks that including Indian corporate bonds in global investment indices will make them more credible and accessible to foreign investors. This move aligns to make India's financial markets more competitive globally. As SEBI works to make sure information-sharing rules meet international standards and are strong, they remain dedicated to prioritizing investors' interests and keeping a close eye on the Indian securities market. 

SEBI's role in shaping the Indian debt market is crucial for maintaining market integrity and building investor confidence. By setting strong rules, overseeing market players, and promoting transparency, SEBI plays a significant part in developing a vibrant and resilient debt market in India. As financial markets evolve, SEBI continues to be a vital force in ensuring the stability and growth of the Indian debt market.