- The Securities and Exchange Board of India (SEBI) has approved critical modifications to the legislation governing real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), with the goal of increasing their investor appeal.
- Similar to mutual funds, these investment vehicles aggregate resources to invest in real estate or infrastructure projects.
What are REITs and InvITs?
| Real Estate Investment Trusts (REITs) | Infrastructure Investment Trusts (InvITs) | |
| Structure | Investment trusts owning real estate properties | Investment trusts owning revenue-generating infrastructure projects |
| Regulation | Regulated by SEBI | Regulated by SEBI |
| Assets | Commercial real estate properties (no residential) | Operational infrastructure projects |
| Units | Units issued to investors, traded on stock exchanges | Units issued to investors, traded on stock exchanges |
| Distribution | Mandatory distribution of a significant portion of income as dividends | Mandatory distribution of a certain percentage of cash flows as dividends |
| Tax Benefits (Dividends) | Dividend distribution exempt from DDT | Dividend distribution exempt from DDT |
| Taxation (Investor’s Dividends) | Taxable as per investor’s income tax slab | Taxable as per investor’s income tax slab |
| Asset Focus | Commercial properties: office buildings, malls, etc. | Operational infrastructure projects |
| Purpose | Income generation and capital appreciation | Income generation and capital appreciation |
| Project Type | Income-generating properties | Operational brownfield projects |
| Examples in India | Embassy Office Parks REIT, Mindspace Business Parks REIT | IndiGrid Trust, IRB InvIT Fund, Sterlite Power Grid Ventures InvIT |
Importance of REITs and InvITs
- Investment Pooling: REITs and InvITs serve as investment pooling vehicles, allowing sponsors to invest in real estate or infrastructure projects.
- Affordability: REITs provide retail investors with access to income-generating real estate investments that would otherwise be out of reach.
- Direct Investment: Infrastructure investment trusts (InvITs) allow individual and institutional investors to participate directly in infrastructure projects in the transportation, energy, and communication sectors.
REIT and InvIT Performance
- Gaining Popularity: Since its inception in 2019, REITs have gained traction, exhibiting resilience in the face of obstacles such as the pandemic.
- Rising Interest: With several listings, including IRB InvIT Fund and Embassy Office Parks Reit, invITs have a greater scope.
- Assets Under Management: As of January 1, 2023, REITs and InvITs registered with Sebi managed assets totaling more than 3.5 trillion.
Sebi’s Modifications
- Unit Holder Nomination powers: Sebi has awarded unit holders of InvITs and REITs board nomination powers, giving them additional influence.
- Changes to the minimal Unit Holding Requirement: The minimal unit holding requirement for sponsors has been altered to increase flexibility.
- “Self-Sponsored Investment Managers”: Sebi pioneered the notion of self-sponsored investment managers, allowing them to serve as Reit sponsors.
The Importance of Changes
- Enhanced Corporate Governance: These revisions are intended to strengthen corporate governance and simplify the operation of InvITs and REITs.
- Retail Unit Holder Rights: The Stewardship Code empowers retail unit holders by providing them a voice and enforcing accountability.
- Sponsor Commitment: Sponsors are now obligated to keep a certain number of units in their portfolios during the life of the Reit or InvIT.
- Self-Sponsored Investment Managers: This approach gives Reit sponsors with freedom and prospective exit alternatives.
Source: https://www.sebi.gov.in/sebi_data/meetingfiles/jul-2023/1688555899311_1.pdf