The government has already permitted REITS and InvITs to function in India in a big way. While the permission was granted nearly 3 years back, these products had failed to take off due to ambiguity over tax related issues. With these tax issues addressed in the Union Budget, it is time for REITS and InvITs to take off in India in a big way. But first, how exactly do these products work.
What exactly are REITS and InvITs?
Real Estate Investment Trusts (REITs) are similar to a mutual fund in their core intent. The only difference is that while mutual funds essentially invest in equity and debt, REITs invest in a portfolio of real estate. REITs essentially focus on residential and commercial properties with a medium term gestation period. Infrastructure Investment Trusts (InvITs), on the other hand create a portfolio of infrastructure assets like roads, bridges, highways, irrigation projects etc. These are fairly long gestation projects and therefore are more suitable for investors with longer time horizons. Like a mutual fund, these REITs and InvITs create a diverse portfolio of assets and then issue them into compartmentalized units to retail and institutional investors.
What you need to know about REITs and InvITs in India…
- Both REITs and InvITs will be pass-through products in the sense that they will be exempt from dividend tax to avoid double taxation. This was one of the key requirements for the success of REITs and InvITs.
- REITs will offer small and medium sized investors a dematerialized and scientific method of participating in the real estate market. It will also allow them to create a diverse portfolio of de-risked real estate assets, which will not be possible for an investor under normal circumstances.
- InvITs, on the other hand, will be a great advantage for institutional investors like insurance companies and pension funds who have long term liabilities and long time horizons. Investing in such infrastructure projects will not only lock in their funds at higher returns for longer periods of time. This will ensure that the risk of maturity mismatch is reduced to a large extent.
- Both REITs and InvITs are permitted to invest in completed and under construction projects. This gives these products a much wider investable basket. Also it allows buying of assets at much better prices ensuring better ROI in the process.
- From the point of view of developers, REITS offer an innovative method of funding their projects through the equity route rather than relying entirely on debt. This becomes important with the recent drying up of funds for realty projects due to NPA pressures.
- For infrastructure project developers this will be an additional benefit. It allows them to follow an asset-light model. By hiving off their infrastructure assets to InvITs, the infra company can purely focus on operating the infrastructure rather than carrying the asset on their balance sheet. This will ensure that the ROI of the company improves substantially and the risk is shared in a much better manner.
- The REITs will be a major push for Indian realty companies who have substantial funds locked up in unfinished projects or in disputed projects. It will allow these realty developers to monetize their assets, release their funds and deploy it more productively in other projects. It will essentially hit two birds with one stone for the realty companies.
- Even from a macroeconomic standpoint, this has a lot of critical relevance. India needs to annually invest nearly $200 billion into infrastructure over the next 5 years to bring Indian infrastructure to Asian levels. This will not be possible without a good risk sharing mechanism and that is offered by these InvITs. It will also attract foreign participation in such projects.
- This also has a very important macro implication in the form of enhanced GDP growth. It is expected that in India, better infrastructure could add another 2% to annual GDP growth. At the current GDP level of $2.2 trillion, this translates into an additional annual income generation of $44 billion, which could have a huge downstream spill over effect.
- For investors looking at regular income, these REITS and InvITs could offer an additional source of investments. Since REITS and InvITs will be required to pass on most of their earnings to the end investor, the yields are likely to be higher.
REITS and InvITs are products that were long sought for in India. The products had lagged due to lack of legal and regulatory clarity. With the clarifications coming in, the boom may be set to begin. IRB has already taken the initiative to launch India’s first InvIT and it may set the trend for many more along the way. For Indian infrastructure, this could be the much needed impetus!