REITs and InvITs
Intuition
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) allow ordinary investors to own slices of commercial real estate or infrastructure assets, things like grade-A office parks, retail malls, highways, power transmission lines, and gas pipelines, that were previously accessible only to large institutional investors or ultra-HNI individuals.
These are yield-bearing instruments at heart. Unlike growth stocks where you wait for price appreciation, REITs and InvITs distribute a large portion of their income (rental income, toll collections, user fees) as regular distributions to unit holders, quarterly or semi-annually. The total return is a combination of distribution yield and capital appreciation (or depreciation) of unit price.
SEBI introduced the REIT framework in 2014 and InvIT framework in 2016. India now has several listed REITs (Embassy REIT, Mindspace REIT, Brookfield REIT) and InvITs (IndiGrid, IRB InvIT, Powergrid InvIT) offering Indian investors exposure to institutional-quality assets.
Mechanics
REIT structure:
- Trust holds SPVs (Special Purpose Vehicles) that own the underlying real estate assets
- Manager (appointed by sponsor) handles day-to-day operations
- Trustee holds assets on behalf of unit holders
- SEBI mandates minimum 80% of assets in completed, revenue-generating assets; max 20% in under-construction
- Min 90% of net distributable cash flow (NDCF) must be distributed to unit holders
- Listed on NSE/BSE; minimum lot size reduced to 1 unit (previously 200 units)
Valuation framework:
- Distribution yield = Annualised Distribution per Unit ÷ Market Price: primary yield metric
- NAV-based valuation: Independent valuers assess the fair value of underlying assets semi-annually. Price-to-NAV shows premium/discount.
- Cap Rate (Capitalisation Rate) = NOI ÷ Property Value: used to value the underlying real estate
- NOI = Gross Rental Income − Property Operating Expenses (excl. D&A and interest)
InvIT vs REIT:
| Feature | REIT | InvIT |
|---|---|---|
| Underlying assets | Commercial real estate | Infrastructure (roads, power, pipelines) |
| Cash flow nature | Rental income | Tolls, user fees, availability payments |
| Concession risk | Long leases | Concession period (typically 25–30 years) |
| Leverage allowed | Max 49% of asset value | Max 49% of asset value |
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