With the COVID-19 outbreak continuing to impact and stymie growth in the country’s real estate sector, the market has been looking around for positive developments in a gloomy environment. Interestingly, recent market dynamics since the pandemic struck, throws light on the fact that investment instruments like Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have been gaining considerable recognition among issuers as well as institutional investors in the country. This has brought forth a ray of hope in an otherwise beleaguered market.
In present times, infrastructure and real estate are undoubtedly two of the most critical sectors in a developing economy. India’s real estate sector holds great importance being the second largest employer in the country after agriculture – its market size expected to reach USD 1 trillion by 2030, contributing 13% to the country’s GDP by 2025. The infrastructure sector, on the other hand, has received immense government support for its development and includes segments related to energy, water and sanitation, communication, transport, social and commercial infrastructure. Thus, while a REIT involves a portfolio of commercial real assets, a large portion of which is already leased out, InvITs include a portfolio of infrastructure assets such as highways, power transmission assets, et al.
REITs, today, are emerging fast as a viable investment option as they are real estate asset backed, operated and maintained by trusts. On a global scale, the share of REITs in the overall real estate market capitalization is quite substantial. REITs were first introduced in the US in the early 1960s and since then they have become a preferred mode of investment across the world. In contrast, regulations governing REITs and InvITs were introduced in India in 2014 and have undergone several amendments over the years in order to align them with stakeholders’ expectations. These investment avenues are still at a nascent stage in India. The country currently has two REITs listed, comprising a large volume of operational commercial buildings with Category A tenants and with good tenant mix. Not surprisingly, there has been an increased interest observed in REITs, resulting in a whopping investment of INR 735 crore in H1 2020 – nearly three times the investment when compared to the corresponding period last year. Given that investor interest in the residential segment is declining, primarily owing to the inability of monetising assets and limited appreciation in property prices, REITs stand to gain substantially. As a matter of fact, Embassy Office Parks REIT saw an outstanding performance, exceeding 8% distribution yield on a pre-tax basis for the first year. The price of the unit had appreciated by 20% since listing, giving a total return of 28%.
At present, Embassy Office Parks REIT and Mindspace REIT are the only two listed REITs in India, the latter launched in July, 2020, and hence not a contributory to the investment recorded in H1 2020. In 2019, US REITs market capitalization was 96% of the total real estate market capitalization while in India, the share of REITs was only 17% with Embassy being the only listed REIT. With the recent Mindspace issue, the share is anticipated to increase considerably. Meanwhile, since the time Securities and Exchange Board of India (Sebi) introduced InvITs, there has been listing of two public InvITs – IRB InvIT Fund and India Grid Trust. Other InvITs such as IndInfravit Trust, India Infrastructure Trust, Oriental InfraTrust and Tower Infrastructure Trust, were privately placed.
REITs and InvITs are further considered to be strong potential investment options as under Sebi regulations, REITs and InvITs need to distribute a minimum of 90% of their cash flows to unit holders – thereby making them attractive instruments for debt and hybrid mutual funds, given their regular pay-outs. Not surprisingly, mutual funds have been seen to actively invest in them over the last one year. In 2019, mutual funds invested over INR 12,000 crore in such units, that included INR 670 crore in REITs and INR 11,347 crore in InvITs.
Thus, although the introduction of these two instruments of investment have been fairly new to the Indian market, the inclination shown for them has been quite encouraging and is expected to gain momentum further. It has been observed that, given the volatile nature of most other asset classes, particularly during such testing times, real estate is turning out to be a prudent bet and a strong hedge against market volatility for most investors. With several key factors, such as the economic growth of the country – expected to revive substantially in Financial Year 2021-22, the presence of a strong middle-class populace and a continual need for commercial spaces in employment hubs, along with infrastructure – we believe that the market for these investment instruments will observe significant growth in the forthcoming period.