The Securities and Exchange Board of India (Sebi) plans to introduce regulations for follow-on offers by real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) to facilitate the growth of emerging investment instruments.
These trusts were introduced in India to allow investors to engage with real estate and infrastructure projects and help them diversify risk through collective pooling.
REITs primarily invest in ready-to-use income-generating real estate assets. On the other hand, privately placed InvITs can also allocate investments in under-construction assets besides completed projects for revenue generation, while publicly offered InvITs mainly invests in completed projects to generate revenue.
“Taking cognizance of the potential of REITs and InvITs in driving the future of Indian infrastructure, Sebi would endeavour to further develop the market for REITs and InvITs in the coming years through policy measures, including considering bringing in norms for follow-on offers by REITs and InvITs,” Sebi said in its annual report for 2022-23.
REITs are companies that operate, own, or finance income-producing real estate projects across the spectrum. Real estate companies are selected for REITs based on several criteria. REITs provide investors to acquire a stake in real estate assets.
Investors can consider REITs as security for regular income, portfolio diversification, and long-term capital appreciation. Most REITs trade on major stock exchanges, and they offer investors a number of advantages.
“REITs are securities associated with real estate and can be traded at the stock exchange once they get listed. The structure of REITs is similar to that of a mutual fund having sponsors, trustees, fund managers, and unit holders. However, unlike mutual funds, where the underlying asset is bonds, stocks, and gold, REITs invest in physical real estate. The money collected is deployed in income-generating real estate, and this income gets distributed among the unit holders. Besides regular income from rents and leases, gains from capital appreciation of real estate is also a form of income for the unit holders,” says Shobhit Agarwal, managing director (MD) and chief executive officer (CEO), Anarock Capital, a real estate services company.
InvIT is similar to a REIT and is a registered business trust overseen by the market regulator. Its purpose is to possess, run, and oversee functional infrastructure assets. These assets, which generate consistent long-term revenue, produce cash flows that are subsequently distributed at intervals to unit holders.
InvITs exhibit a blend of characteristics from both equity and debt investments. The operational business framework ensures steady, foreseeable, and moderately low-risk cash flows similar to debt instruments. However, they also present growth potential akin to equity investments, as the returns aren't fixed, and the unit price holds the potential for change.
Sebi has been consistently working on enhancing the regulatory structure and simplifying procedures for these two offerings. To streamline the public issuance of REITs and InvITs, Sebi has reduced the time between issue closure and allotment/listing from 12 to 6 working days. “REITs and InvITs are other innovative mechanisms to finance real estate and infrastructure, which in turn can have a multiplier impact on India’s economic growth,” Sebi said.
Last week, Sebi issued regulations granting unique privileges to REIT unitholders, enabling them to appoint representatives to the boards. Moreover, Sebi introduced the concept of self-sponsored REITs. Three fresh InvIT registrations and one REIT registration in 2022-23 show the market’s enthusiasm for REITs and InvITs.
This brings the cumulative count of registered InvITs to 20 and five for REITs. The net asset value under the management of REITs was Rs 70,614 crore, while for InvITs, it was Rs 1,76,957 crore in March 2023. In FY2022-23, InvITs raised Rs 6,360 crore, while REITs did not mobilize any new capital in that period.
