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Real Estate with REITs & InvITs

Real State with REITs & InvITs

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.

What are InvITs?

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.

Differences Between REITs and InvITs

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:

1. Structure

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.

2. Revenue Generation and Stability

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.

3. Risks

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

For non-traded REITs, the investors will be unable to assess the value of their investments and have to trust the REIT to ensure returns. Further, they are illiquid and can also have a lock-in period. Lastly, most non-traded REITs charge an upfront fee that can corrode the overall returns.

For publicly-traded REITs, the biggest risk is the interest rate risk. As can be seen in the more established US markets, when the interest rates rise, investors sell REIT units and opt for safer investments. Ironically, when interest rates rise, the economy is expected to be doing better and an indicator of rising rents and occupancy rates, indicating better-performing REITs. However, trends around the world show otherwise creating a risk for investors.

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

Investors are never completely aware of the true worth of the projects. While the company offers a valuation report that outlines the expected returns based on the usage of the infrastructure, it is based on predictions.

The risk of failure of the project is transferred to the investors. So, if the trust undertakes a road project and revenues are based on toll collection, then estimations will factor in projected traffic. However, if that doesn’t come true or if the government develops another toll-free road, then the project can fail resulting in minimal or zero returns.

InvITs also have political or regulatory risks. Most of these trusts receive concessions on infra projects by the government. A change in the regulation or policy can undo these concessions making profitability difficult for the trust.

4. 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.

5. Liquidity

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.

6. 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.