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Better late than never! Investors finally lap up Indian REITs & InvITs

Better late than never! Investors finally lap up Indian REITs & InvITs

By Sunil Sanghai




Almost 60 years back in 1961, the first REIT (real estate investment trusts) product was launched in the US. Over time, many other countries have introduced this product. In India, REITs regulations came into effect only in 2017 and the first REITs offering was launched in 2019.

However, within a short period of two years, the product has gained significant popularity among issuers as well as institutional investors.

REITs and infrastructure investment trusts (InvITs) are innovative vehicles that enable developers to monetise their revenue-generating real estate/infrastructure assets and release capital for funding new infrastructure/real estate projects. REITs/InvITs allow investors to invest in these assets without owning them.

Since the units of the trusts are listed on the stock exchanges, they also provide liquidity to investors in an otherwise largely illiquid asset class.

Current status in India


Globally, the share of REITs in the overall real estate market-cap is quite significant. In 2019, US REITs market-cap was 96 per cent of the total real estate market-cap. in Singapore, Japan and Malaysia, it was at 55%, 51% and 42% respectively. In India, the share of REITs was only 17% with Embassy being the only listed REIT.

With the recent Mindspace issue, it is now expected to be 29 per cent of the total real estate market-cap. So far, we have seen three REITs and seven InvIT issuances (five private and two public) in the country. According to various market studies, the Indian REITs market may grow to $22-40 billion over next few years.

REITs and InvITs have in general outperformed their respective sectoral indices, the S&P BSE Realty Index and the BSE India Infrastructure Index. REITs and InvITs offer a stable cash flow and, therefore, give consistent returns to investors. They attract a new class of investors, who does not like to take implementation/ construction risk.

Growth to the investor is provided by adding more assets to the trust. REITs and InvITs are exempted from dividend distribution tax and there is a relaxation of capital gains tax as well.

While investing in REITs and InvITs, investors should evaluate and assess the quality of the underlying asset portfolio and cash flows. They should also consider the leverage situation, experience of the investment manager and risk management policies of the issuer.

Encouraging retail participation


Overall, the shareholding of Indian REITs/ InvITs is skewed towards institutional investors (mostly FPIs), with very minimal contribution from retail investors. Embassy has a public shareholding of ~39 per cent, of which FPIs hold 26 per cent and non-institution individuals 9 per cent. IndiGrid has a public shareholding of 85 per cent, of which FPIs constitute 55 per cent and non-institution individuals 13 per cent. Embassy’s daily average traded volume of 6 million as a percentage of free-float shares is 0.31 per cent.

Compared with REITs, InvITs are more thinly traded – IndiGrid daily average traded volume 6 million as a percentage of free float shares is 0.09 per cent only.

To encourage retail investors from participating in REITs/ InvITs, the market regulator should open up REITs/ InvITs gradually lowering the minimum investment size from Rs 50,000 and Rs 1 lac to the value of just a single unit, much like how stocks are traded in line with global practices, where even a single REIT can be traded.

Such a reduced investment threshold can improve liquidity and result in a diverse investor base. It will help channel household investments into commercial real estate and infrastructure.

The way forward


At this point, India is not ready for residential REITs, as the residential property market is currently highly fragmented and unorganised. It is skewed towards developer selling properties to fund their working capital requirement. However, a new class of assets such as telecommunication infrastructure, industrial parks including distribution centres, warehouses, data centers, retail malls and healthcare facilities, including senior living facilities, may be offered under this product.

(Sunil Sanghai is Founder & CEO of NovaDhruva Capital. Views are his own.)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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