REITs and InvITs the new era investing

 

What are REITs?

Real Estate Investment Trusts or REITS are investment trusts (like mutual funds) that own and operate real estate properties, generating regular income and capital appreciation on their investments.

They pool funds from investors, offering them a liquid way of entering the real estate market while helping them diversify their portfolio and earn regular income plus long-term capital appreciation.

What are InvITs?

Infrastructure Investment Trusts or InvITs are also like mutual funds that pool money from investors that own and operate operational infrastructure assets like highways, roads, pipelines, warehouses, power plants, etc. They offer regular income (via dividends) and long-term capital appreciation.

 

Differences Between REITs and InvITs

While real estate and infrastructure investments can be called ‘first cousins’ in the investing world, there are several differences that investors must be aware of before making the decision of buying them. Here is a detailed look at how REITs and InvITs differ from each other

 

1. Structure

Structurally, a REIT and InvIT are very similar. They are investment trusts that pool money from investors and have a trustee, sponsor, and manager. 

REITs invest in completed and under-construction real estate projects. They have to ensure that at least 80% of the assets are invested in completed and income-generating properties.

Further, they cannot invest more than 20% of the assets in under-construction properties or debt instruments of a real estate company or shares of listed companies deriving an operating income of less than 75% from real estate activities/government securities/money market instruments.

InvITs, on the other hand, invest in infrastructure projects pertaining to roads, power plants, highways, warehouses, etc.

They have to ensure that at least 80% of the assets are invested in completed and revenue-generating infrastructure project(s). Further, they cannot invest more than 20% of their assets in other eligible investments.

InvITs must also ensure that investments in under-construction projects, a debt of companies from the infrastructure sector, listed equity shares of companies not having less than 80% of their income from the infrastructure sector/government securities/money market instruments, cannot exceed 10% of the InvIT’s value.

 

2. Revenue Generation and Stability

REITs own real estate properties and generate revenue by leasing, renting, or selling them. SEBI mandates them to invest at least 80% of their investable assets in developed and income-generating properties.

Currently, REITs are allowed to invest only in commercial real estate properties and NOT residential ones. Further, they need to distribute 90% of their income to investors in the form of dividends. If the REIT decides to sell a property, then it can choose to reinvest the sale proceeds into another property or distribute 90% to unitholders.

InvITs hold infrastructure assets that are operational and income-generating like gas pipelines, roads, power transmission lines, etc. These trusts have long-term contracts with strong parties ensuring a steady stream of revenue.

They also need to distribute 90% of their net distribution cash flow to investors. If the InvIT decides to sell an asset, then it can choose to reinvest the sale proceeds into another infrastructure project or distribute 90% to unit holders.

If we compare the stability and revenue generation, REITs are more stable since 80% of their assets are invested in income-generating assets with rental contracts that ensure a steady income.

On the other hand, the cash flows of InvITs depend on a lot of factors that can affect their capacity utilization. Also, the restrictions on tariff scalability can hamper their efforts to ensure sustainable growth.

On July 30, markets regulator Sebi reduced the minimum application value of REITs and InvITs, and revised trading lot to one unit for these emerging investment instruments to make them attractive for retail investors.

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) now constitute a new asset class available for investors, allowing investors to invest in completed real estate and infrastructure assets with a low ticket size and adequate liquidity.

Last month, the minimum application value for retail investors of REITs and InvITs was reduced by SEBI within the range of Rs 10,000-15,000 (from Rs 50,000 for REIT and Rs 1 lakh for InvITs) at the time of listing with a revised minimum trading a lot of one unit. The move is expected to enhance the liquidity of the asset class in addition to providing the depth to the market.

Taxation for REITs / InvITs and investors

The Income-tax Act, 1961 provides separate tax provisions for ‘business trusts’ i.e. REITs and InvITs. These provisions are applicable irrespective of the business trust’s public or private status or whether such trusts are listed or unlisted. The business trust receives from SPVs, income in the nature of dividend and interest, and has further cash flows on repayment of capital invested in the SPVs.

Taxation of SPVs

The SPVs pay tax on their respective taxable income, which is computed after deducting all allowable expenses (including interest paid to the REIT/InvIT) from the business income. For companies, such tax maof unit holders, there is an exemption available to unit holders if the SPVs held by the business trusts have not elected for the concessional corporate tax regime. This would be fact specific and if exemption is applicable, the business trust would communicate the extent of dividends which are exempt in the hands of the unit holders.

 

The capital gain tax rate on transfer of listed units of InvIT and REIT in case of resident unit holders is 10% (plus surcharge/cess) for long term gains (held for more than three years), and 15% (plus surcharge/cess) for short term gains.

As the Indian economy starts recovering, listing of REITs/InvITs is expected to gather steam, as a common platform for both developers looking to monetize their assets and for investors who realize the need to participate in small amounts in large capital-intensive sectors.y be the normal rate of 25% plus surcharge and cess, or the concessional rate of 22% plus

 

 

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