REITs and InvITs, Explained Simply

A REIT pools money from investors to own completed, rent-earning commercial real estate, mainly office buildings, business parks and malls. Tenants pay rent, and the REIT passes most of that income to unit holders.

REITs are registered with SEBI, must follow rules on what they own, and are listed on stock exchanges, so you can buy and sell units like shares.

An InvIT works in a similar way but owns infrastructure assets: toll roads, power transmission lines, renewable energy plants, telecom towers or pipelines. These assets earn tolls, usage charges or contracted fees.

InvITs are also SEBI-regulated, and many are listed. They distribute most of their cash flows to investors.

Both types of trust are required to distribute a large share of their net distributable cash flows to unit holders, usually every quarter. These payouts can include interest, dividends and repayment of capital, each treated differently for tax.

Payouts are not fixed. They depend on rents, occupancy, tolls and other income, and can rise or fall.

Units trade on the exchange, so their price changes every day with demand, interest rates and the outlook for the assets. When interest rates rise, REIT and InvIT prices often fall, because their payouts become less attractive compared with bonds.

Our page on risk and volatility explains how to think about price swings.

Buying a flat or shop needs a large amount, registration costs, maintenance and finding tenants. A REIT unit can be bought for a small amount, with professional management and a spread of tenants across several buildings.

But you do not get to live in it or control it, and you are exposed to the commercial office and retail market, not homes. Our page on mutual funds versus real estate compares property with financial assets.

Some people treat these trusts as a deposit alternative because they pay regularly. That is risky thinking. A deposit has a known rate and no price risk. A REIT or InvIT payout can change, and the unit price can fall.

Our page on mutual funds versus FD explains how market-linked products differ from deposits.

• Occupancy and tenant risk: empty offices or a big tenant leaving can cut income.
• Interest rate risk: rising rates often push prices down.
• Traffic and usage risk: toll roads depend on traffic levels.
• Concentration: each trust owns a limited set of assets.
• Liquidity: some units trade thinly.
• Regulatory change: tax and rules can change.

Listed REITs and InvITs are bought through a demat and trading account on the stock exchange, like shares. Our page on demat accounts explains how they differ from mutual fund folios.

You can also get some exposure through mutual funds, as some schemes are allowed to hold a portion in REITs and InvITs.

SEBI allows mutual funds to invest a limited share of their money in REITs and InvITs. Some hybrid, multi asset and dividend-oriented funds hold them as part of a diversified portfolio.

This can be a simple way to get a little exposure without picking individual trusts. Our page on multi asset allocation funds explains one such category.

Payouts from these trusts can be made up of interest, dividend and capital repayment, and each part may be taxed differently. Gains on selling units are also taxed under their own rules. We do not quote tax rates.

A tax adviser can help you understand the treatment. Our page on mutual fund taxation explains how fund taxation generally works.

Each trust publishes details of its assets, occupancy, tenants, debt levels and payouts. Check how much debt the trust carries, how long tenant leases run, and how diversified its assets are.

If the reports are hard to understand, a fund that holds several trusts may be simpler.

Investors who already have a solid core of diversified funds and an emergency fund, and want a small extra exposure to commercial property or infrastructure with regular payouts. They should be comfortable with price swings.

Anyone relying on payouts for essential monthly expenses, anyone who sees them as a deposit substitute, and beginners without an emergency fund. For regular income from investments, our page on SWP explains another approach.

These trusts are best treated as a minor part of a portfolio. We do not recommend a specific percentage. Keep them in proportion with your overall asset mix.

Our page on asset allocation explains how to set the balance.

SEBI has also created a framework for smaller REITs, which can own fractional shares of individual properties. These are newer and can carry more concentration risk, since they may own fewer assets. Read the details carefully, and be wary of platforms promising high, steady rental income from fractional property ownership outside the regulated route.

• What assets does the trust own, and where?
• How full are the properties, and how long are the leases?
• How much debt does the trust carry?
• How have payouts changed over the past few years?
• How easily do the units trade?

A trust showing a high payout yield after a price fall may be facing real problems, such as falling occupancy. Look at why the price dropped before treating it as a bargain.

• REITs: commercial property. InvITs: infrastructure.
• Regular payouts, but not fixed.
• Prices move with rates and markets.
• A small diversifier, not a core holding.

We are distributors rather than investment advisers and we recommend no schemes. If you want help seeing where these fit, get in touch.