REITs and InvITs: Mobilizing Trillions for Infrastructure Development

India's infrastructure, despite encountering various challenges, presents massive opportunities for growth and development. According to Global Infrastructure Outlook, there is an estimated shortfall of US$ 18 billion for infrastructure development in India. While this gap is substantial it is not insurmountable. India has a track record of attracting investments and promoting collaborations, between the public and private sectors. By utilizing these advantages, the country can close the gap and unleash the possibilities of infrastructure development.

Innovative solutions such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) could help to reduce this deficit. These platforms raise money from various investors, such as pension funds and private individuals, to support income-generating projects in the real estate and infrastructure sectors. Imagine owning a share in a shopping centre through a REIT or a share in a toll road through an InvIT. Both options offer profit opportunities and the chance to participate in projects that improve the community. Recent technological advancements are also a source of much optimism. An article in the Economic Times pointed out that fund-raising by REITs and InvITs in India rose to Rs. 17,116 billion (US$ 2.05 billion) in FY24. This is an increase from the historic low of Rs. 1,166 crore (or US$ 139 million) in FY23, indicating the growing interest in these investment vehicles and their ability to raise capital on a large scale.

Unveiling investment opportunities: REITs and InvITs

The landscape of investment is evolving, offering diverse options for individuals and institutions. Two of the innovative vehicles gaining traction are REITs and InvITs.

• REITs:

Investing in Real Estate Investment Trusts (REITs) provides individuals, with an opportunity to enter the real estate market without the complexities of property ownership. Essentially REITs gather funds from a pool of investors. They utilize them to acquire and oversee a variety of properties such as shopping centers, office buildings and healthcare facilities. The selection of properties is done thoughtfully to maximize earnings. The key benefit of REITs lies in their dividend distribution structure. By law, they are obligated to distribute a significant portion (around 90%) of their taxable income to shareholders as dividends. This translates to a predictable stream of income for investors. Furthermore, if property values appreciate over time there is potential, for capital growth as well.

• InvITs:

InvITs expand on the concept of REITs by focusing on an asset class-Infrastructure. Similar to REITs, InvITs pool funds from investors to invest in revenue-generating infrastructure assets. These assets encompass various projects for societal advancement including toll roads, bridges, airports, ports, power plants, transmission lines, pipelines, and communication towers.

InvITs work by generating regular cash flow. They do this through user fees, tolls or long-term contracts tied to the infrastructure they own. Such steady cash flow means predictable dividend payouts for investors, which is similar to how REITs operate. But here's the twist: InvITs usually take on longer-term projects that might require bigger upfront investments compared to REITs. This difference can change their risk profile and what returns could look like. Thus, while they do offer some diversification benefits, one might find InvITs less liquid than REITs.

Source - CRISIL

Why REITs and InvITs are revolutionizing infrastructure financing

The Indian infrastructure landscape is up against a massive hurdle—a whopping US$ 18 billion funding gap, as noted in a report from the Global Infrastructure Outlook, a project by the G20. Traditional ways of financing are having a tough time keeping up. They are heavily reliant on public budgets whereas banks are being careful about the long-term risks tied to infrastructure projects. This is where REITs & InvITs come into play. They offer a fresh approach to infrastructure financing by unlocking a wider pool of private capital.

• A flood of private capital

REITs and InvITs act as investment vehicles, pooling funds from various sources, including pension funds, insurance companies and retail investors. This significantly broadens the investor base compared to traditional methods. The appeal for investors is multifaceted. REITs and InvITs offer the potential for stable and predictable returns through regular dividend payouts. These dividends often stem from the steady rental income generated by the underlying assets, be it a shopping mall in a REIT or a toll road in an InvIT.

• Benefits beyond returns

The advantages for investors extend beyond potential income and diversification. REITs and InvITs are typically structured with a focus on transparency and professional management. Investors benefit from the expertise of experienced teams responsible for selecting, managing, and maintaining the underlying assets.

• Aligning incentives for project efficiency

Perhaps, the most transformative aspect of REITs and InvITs lies in their inherent incentive structure. Since their primary goal is to generate returns for investors, these investment vehicles prioritize efficient project management. This focus on operational excellence can lead to improved project lifecycles, cost control measures, and a sustainable infrastructure sector.

• Early signs of success

The positive impact of REITs and InvITs is becoming evident. A report by The Hindu BusinessLine highlights the robust growth of these investment vehicles in India, with fund mobilization reaching a staggering Rs. 11,474 crore (US$ 1.37 billion) in 2023. Furthermore, listed Indian REITs and InvITs distributed over Rs. 30,000 crore (US$ 3.59 billion) to unit holders since their inception. These figures paint a promising picture for the future of infrastructure financing.

Source- CRISIL

The road ahead: Navigating challenges and seizing opportunities for REITs and InvITs

While the potential of REITs and InvITs to transform infrastructure financing is undeniable, challenges pertain to the path of widespread adoption.

• Building a robust regulatory framework

A well-defined and efficient regulatory framework is crucial for the smooth functioning of these investment vehicles. Positive steps have been taken in this direction. For instance, Securities and Exchange Board of India (SEBI) is exploring the possibility of allowing REITs and InvITs to issue subordinate units. This could enhance their fundraising capabilities and provide additional flexibility. Additionally, SEBI is continuously evaluating and refining regulations to ensure transparency and investor protection.

• Deepening the market

Currently, the market for REITs and InvITs is nascent in many regions. A deep market with a wide variety of players is essential to attract large investments. This necessitates an increase in the number of listed REITs and InvITs, encompassing a broader range of asset classes within infrastructure and real estate. Furthermore, recent proposals by mutual funds to launch dedicated REIT and InvIT schemes could play a key role in expanding the investor base.

• Unlocking potential through investor awareness

A significant hurdle lies in raising investor awareness about REITs and InvITs. Many potential investors remain unfamiliar with these investment vehicles and their associated benefits. Educational initiatives and targeted outreach programs can bridge this knowledge gap. Building trust and transparency will be critical in attracting a wider pool of investors and unlocking the full potential of REITs and InvITs.

• Government incentives

Supportive government policies can play a significant role in fostering the growth of REITs and InvITs. Initiatives such as tax breaks, as recently proposed by the Indian government, can incentivize investment and make these vehicles even more attractive.

By tackling these challenges, REITs & InvITs could stand out as important players in the global infrastructure landscape. A joint effort by regulators, financial institutions, and investors can help these funding options bridge the infrastructure gap and boost economic growth in the country.

Conclusion

India is facing various challenges with its infrastructure and the lack of funding is hindering economic progress. Solutions are emerging, such as REITs & InvITs.  These investment vehicles act like magnets, attracting private capital from various sources, such as pension funds and individual investors. The advantages go beyond financial backing as REITs and InvITs encourage better project management practices, which contribute to infrastructure growth. As of 2023, India's REIT and InvIT market has surpassed Rs. 11,474 crore (US$ 1.37 billion). While challenges such as regulatory frameworks and investor education need attention, a collaborative approach can unlock the potential of REITs and InvITs. Imagine a future where India boasts an infrastructure network supported by investments and effective project management. REITs and InvITS could indeed be the solution, to unlocking a future that nurtures a prosperous India for all.