Two emerging and promising asset classes

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There’s an old joke (and belief, to some extent) that if you want to make a big fortune in the stock market, you have to start small.

This may or may not be true. But what is definitely true is that to make a fortune in the markets today, you don’t have to rely exclusively on stocks. There are a few new asset classes in play now.

Two alternatives that particularly stand out are REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts).

Both are relatively young instruments in the Indian context and although they vary in specifics, they both offer unique and similar mechanisms for raising capital.

for your information: While we’ve already covered explainers on REITs and InvITs, a lot more has happened on their investment and regulatory fronts since then.

Now we bring you a roadmap of these “developments”.

A brief on the basics

Traditionally, in India, real estate is owned by real ownership terms, such as registered ownership of a house or building. REITs break with this tradition as they include the ownership of securitized real estate assets.

Basically, REITs are securities (units) with physical real estate as the underlying asset that can be traded on an exchange after listing. While REITs deal with commercial/residential real estate (specifically, “revenue-generating” real estate), InvITs deal with dedicated infrastructure projects such as ports, roads, dams, etc. (projects with “long-term” gestation periods). Think of the two as first cousins ​​in the investment world.

REITs and InvITs were introduced in the United States in the 1960s. But it was not until 2014 that they were operationalized and come under regulatory jurisdiction in India.

The first REIT was launched in 2019 (Embassy Office Parks). Currently, these are the listing REIT and InvIT in India:

  • Embassy Office Parks REIT
  • Mindspace Business Parks REIT
  • Brookfield India REIT
  • IndiGrid Invite
  • IRB InvIT
  • InvIT power grid

Operation and regulation

The reasons why these new-era investment instruments have recently caught the market’s attention can be summarized as follows:

  1. Ability to generate a regular source of income through dividends.
  2. Potential to provide attractive capital appreciation.
  3. Small investments.
  4. Much higher liquidity than a direct investment in the real estate market or an infrastructure project.
  5. Lower risk because 80% of the corpus is invested in revenue-generating and completed (read: stable) projects.

The unique selling point of REITs and InvITs is that they offer impressive investment entry points for sectors plagued by illiquidity. They transform the asset-heavy model of a sector like real estate or infrastructure into an asset-light model due to their derivative nature.

From a macroeconomic perspective, critical infrastructure projects could also be financed through these instruments, thus reducing the burden on state resources. It would also stimulate higher industrial growth. Perhaps that is why state officials have been quite supportive of REITs and InvITs.

It’s true. Regulatory support for REITs and InvITs has been remarkable in India. The government, in line with its promise in the 2019 budget, has helped create a favorable tax regime and liberalized the ability to invest in these instruments. Numerous legislative changes have been made to open them up to a wide range of retail and institutional investments, including REITs. Indeed, dividend payments to REITs and InvITs are also exempt from TDS (Tax Withheld at Source) to facilitate compliance.

SEBI has further contributed to the process by providing provisions for REITs and InvITs to fund themselves from broad swaths of the capital markets and expand their pool of potential capital. For example, the minimum application value for REIT and InvIT retail investors was reduced by SEBI last year to a range of ₹10,000-15,000 ($134-$202), putting them at the par with other equity-traded instruments in the market. The regulator also allowed the listing of foreign REITs and InvITs in the GIFT City IFSC last year.

Performance and Potential

India’s real estate sector is expected to reach a valuation of $650 billion by 2025, contributing 13% to the national GDP. This is particularly encouraging for the promotion of the REIT/InvIT trend in the country due to their business model focused on monetizing rental commercial space and high-value infrastructure complexes.

Currently, 11 REITs and InvITs are operating in the country, 10 of which have the highest investment grade rating (AAA). REITs, in particular, have braved strong headwinds even through multiple waves of COVID, with their portfolio occupancy remaining above 80%.

India has about 650 million square feet. Class A office space, nearly half of which is REITs up for grabs. In the past year alone, Brookfield and Blackstone (sponsor of Embassy and Mindspace REITs) have added 30 million square feet. Space under their management. Global investors like Blackstone and KKR are emerging as major investors in office assets, which only cements their readiness for REITs.

REITs have also taken on debt at favorable market rates and reduced the overall cost of capital in the process. Considering that REITs offer nearly twice the after-tax returns of most other investments (like fixed deposits, government bonds, etc.), investing in these instruments is all the more attractive.

Similarly, IndiGrid, India’s second InvIT to go public, saw an impressive 35% gain (Jan 2021-Jan 2022) compared to Nifty50’s 26% gain over the same period. It also posted a dividend yield of 8.23% accompanied by its sector counterpart IRB, the country’s first publicly traded InvIT, which posted a yield of 11.55% (TTM).

A Of confidence Future

REITs and InvITs play an important role globally in financing long-gestating, capital-intensive infrastructure projects. The United States alone accounts for 65% of the total market cap of REITs globally, valued at $2.2,000,000.

In India, although their development is still in its infancy, the stability of their assets and their returns similar to those of equities have become too lucrative prospects to be ignored by investors looking to take advantage of gains in capital easy.

Moreover, after inglorious failures in the infrastructure sector (IL&FS, etc.), it may be time for Indian capital markets to consider alternative, hybrid and greener pastures. Institutional support for these instruments, while encouraging at the moment, merits further liberalization to attract the large untapped pool of capital into the retail investment landscape.

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