Everything you need to know about REITS and INVITS

Summary

Introduced in India in 2014, REITs and InvITs are regulated by the Securities and Exchange Board of India (SEBI). In a move to enhance accessibility, SEBI reduced the minimum application value for REITs and InvITs in 2021, making them accessible to a wider range of investors. As of December 31st, 2023, there are four publicly listed and traded REITs and three publicly listed and traded InvITs on the National Stock Exchange (NSE). During April-December 2023, the total funds mobilized by REITs and InvITs amounted to around Rs 23,000 crore, reflecting their growing importance as investment avenues in India's infrastructure and real estate sectors (Source: SEBI).

REITs and InvITs stand out as investment options due to their distinct characteristics and benefits:

1. Diversification: Both REITs and InvITs offer investors a diversified portfolio of real estate or infrastructure assets, mitigating risk compared to investing in individual properties or projects.

2. Stable Income: REITs and InvITs are required to distribute a minimum of 90% of their taxable income to investors as dividends regularly. This ensures a stable cash flow, particularly attractive for those seeking reliable income streams for retirement or consistent returns.

3. Liquidity: Listed on stock exchanges, REITs and InvITs provide liquidity, enabling investors to buy or sell units easily. This liquidity contrasts with the relatively illiquid nature of direct investments in real estate or infrastructure.

4. Professional Management: Managed by experienced professionals, REITs and InvITs benefit from skilled management, which can enhance the performance and value of the underlying assets.

5. Tax Efficiency: Investors in Indian REITs and InvITs enjoy tax benefits, with dividend income being tax-exempt if the REIT/InvIT distributes at least 90% of its taxable income. Additionally, long-term capital gains are taxed at a lower rate than short-term gains.

6. Access to Large-Scale Assets: Investing in REITs and InvITs provides access to large-scale real estate or infrastructure projects that may be otherwise inaccessible to individual investors.

7. Potential for Capital Appreciation: In addition to dividend income, investors may benefit from the potential appreciation in the value of the underlying assets, leading to capital gains.

8. Transparency and Regulatory Oversight: SEBI regulates REITs and InvITs, ensuring transparency and adherence to regulatory standards, providing investors with a level of protection.

Given these unique characteristics, tax advantages, and regulatory oversight, REITs and InvITs offer investors opportunities to participate in the growth of India's real estate and infrastructure sectors. To facilitate exposure to publicly listed REITs and InvITs in a single index, NSE Indices Limited introduced the Nifty REITs & InvITs index in April 2023

The Nifty REITs & InvITs index is designed to mirror the performance of publicly listed and traded Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) at the National Stock Exchange. It encompasses REITs and InvITs that are either listed and traded or permitted to trade on the exchange.

The index weights each security based on its free-float market capitalization, with certain restrictions in place to maintain balance. Individual securities are subject to a cap of 33% of the total index weight, while the combined weight of the top three securities is capped at 72%.

REITs and InvITs are known for their regular income distributions, as they are required to distribute at least 90% of their income to investors on a quarterly basis. This income distribution is reflected in the Total Return Index, which takes into account both the price performance and the dividends received from the securities in the index.

The table provides a comprehensive overview of the Compound Annual Growth Rate (CAGR) of the Nifty REITs & InvITs Index based on Price Returns (PR) and Total Returns (TR) over various time frames. Here's a breakdown of the key insights:

• TR vs. PR: Total Returns (TR) include not only price changes but also additional income generated by REITs and InvITs, such as interest, dividend income, rental income, and return of capital. This highlights the impact of income distributions mandated by SEBI, resulting in TR typically exceeding PR.
• Performance Over Time: The PR for the Nifty REITs & InvITs Index varies across different periods, ranging from -4.15% for the 1-year period to 4.07% for the 3-month period. Conversely, TR ranges from 0.82% for the 1-year period to 9.40% per annum since inception (starting July 1st, 2019).
• SEBI Mandate: SEBI mandates REITs and InvITs to distribute at least 90% of the cash available to unitholders on a quarterly basis, which includes various sources of income. This distribution requirement significantly influences the TR, contributing to its higher values compared to PR.
• Income Generation: The TR captures the full performance of the index, including all income generated, providing investors with a more accurate representation of the index's overall returns.

Overall, the data underscores the importance of considering both price movements and income distributions when evaluating the performance of REITs and InvITs, with TR offering a more holistic perspective for investors.

The performance metrics of the Nifty REITs & InvITs TR index provide valuable insights into its historical returns and risk characteristics:

• CAGR and Volatility: Since July 1st, 2019, the index has delivered a Compound Annual Growth Rate (CAGR) of 9.40%, with an annualized volatility of 12.96%. This indicates the average annual return and the degree of fluctuation or risk associated with the index's returns over the specified period.
• Return to Risk Ratio: Over the last three years, the index has achieved a CAGR of 8.97% with an annualized volatility of 9.52%, resulting in a return to risk ratio of 0.94. This ratio provides a measure of the index's performance relative to its risk exposure, with a value below 1 indicating that the returns may not fully compensate for the associated risk.
• Short-Term Performance: In the past 6 months, the index generated returns of 5.07%, with annualized volatilities of 9.32%. Similarly, over the past three months, it yielded returns of 5.03% with an annualized volatility of 11.64%. These metrics offer insights into the index's recent performance and risk dynamics.

Additionally, the accompanying chart illustrates the movement of the Nifty REITs & InvITs TR index over time, reflecting its fluctuations and trends in performance. Overall, these metrics enable investors to assess the historical performance and risk profile of the index, aiding in informed decision-making and portfolio management strategies.

The performance of the Nifty REITs & InvITs index has demonstrated resilience and consistent growth over the period from July 2019 to December 2023, with positive returns recorded in each calendar year. Despite the global uncertainties brought about by the COVID-19 pandemic in 2020, the index delivered a commendable return of 5.9%. In comparison, the broader Nifty 50 index achieved a return of 16.14% during the same period, indicating the relative strength of the REITs and InvITs sector during challenging times.

The calendar year 2021 emerged as a standout period for the Nifty REITs and InvITs index, with an impressive return of 17.70%. This robust performance outpaced that of the Nifty 50, which delivered a return of 25.59% over the same period. The favorable returns in 2021 underscored the resilience and attractiveness of REITs and InvITs as investment options, even in the face of market fluctuations and economic uncertainties.

Despite a global slowdown in the REITs market in 2022, as reported by Knight Frank and NAREDCO, the Nifty REITs & InvITs total return index continued its upward trajectory, delivering a return of 9.10%. Several factors contributed to this growth, including the burgeoning affordable housing market, increasing demand for luxury housing, and the evolution of affordable rental housing in India. Additionally, the steady rise in household income further supported the positive performance of the REITs and InvITs sector in India.

Overall, the consistent positive returns exhibited by the Nifty REITs & InvITs index across different calendar years reflect the sector's resilience, attractiveness, and potential for growth within the Indian investment landscape.

The analysis of daily rolling returns reveals the performance consistency of the Nifty REITs & InvITs index across different investment horizons. Over a one-year horizon, the index delivered positive returns approximately 68% of the time, indicating a relatively high frequency of favorable outcomes. However, there was some variability in returns, with around 32% of instances resulting in negative returns during this period.

As the investment horizon extends to two and three years, the frequency of positive returns approaches 100%, showcasing a trend of increasing stability and reliability over longer timeframes. For the three-year horizon, the Nifty REITs & InvITs index exhibited returns ranging between 7.5% per annum to 21.4% per annum, with an average return of 12.4% based on daily rolling return analysis. Similarly, over a two-year period, the index delivered an average return of 13.6%, with returns ranging from 2.1% to 34.6%.

Overall, the analysis demonstrates that the Nifty REITs & InvITs index has consistently delivered positive returns for two and three-year investment horizons, with both median and average CAGR returns remaining relatively stable. This consistency underscores the reliability of the index as an investment option, particularly for investors with longer-term investment horizons seeking consistent performance and potential growth opportunities in the real estate and infrastructure sectors.

The composition of the Nifty REITs and InvITs index reflects a significant dominance of REITs over InvITs, with REITs accounting for 70.74% of the total weight in the index, while InvITs constitute 29.25% as of December 29, 2023. This distribution has been consistent across various quarters, indicating the prominence of REITs in the index composition.

Embassy Office Parks REIT holds the highest weight within the REITs component, ranging from 31.7% to 32.9% over six quarters, showcasing its substantial influence on the index performance. Conversely, Brookfield India Real Estate Trust maintains the lowest weight in the REITs component, ranging from 9.02% to 10.3% during the same period. Additionally, the inclusion of Nexus Select Trust, a newly listed REIT, further diversifies the index composition, with a weight of approximately 18.3% as of December 29th, 2023.

Within the InvITs component, POWERGRID Infrastructure Investment Ltd and INDIA GRID TRUST emerge as significant contributors, with their weights ranging from 11.65% to 21.1% and 12.3% to 16.2%, respectively. Together, these two InvITs account for the majority of the weight in the InvITs component, underscoring their influence on the index performance. Conversely, IRB InvIT Fund maintains the lowest weight in the InvIT component across all six quarters, with weights ranging from 5.11% to 7.5%.

Overall, the composition of the Nifty REITs and InvITs index reflects a balanced representation of prominent REITs and InvITs, providing investors with exposure to a diverse range of real estate and infrastructure assets within the Indian market.

Summary and Conclusion 

The Nifty REITs & InvITs Index tracks the performance of publicly listed and traded Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Since its inception on July 1, 2019, until December 29, 2023, the Nifty REITs & InvITs TR Index has demonstrated a Compound Annual Growth Rate (CAGR) of 9.40%. Notably, the index has delivered positive returns in all five calendar years, showcasing its resilience across various market conditions.

Over the 2 and 3 year investment horizon period, the Nifty REITs & InvITs TR index has consistently delivered positive returns, based on daily rolling return analysis. This highlights the index's potential to generate favorable returns for investors over longer timeframes.

Embassy Office Parks REIT has emerged as the highest-weighted stock within the index, maintaining consistent dominance, followed by Nexus Select Trust. Conversely, IRB INVIT FUND holds the lowest weight among the index components, indicating its relatively smaller influence on the index performance.

As of December 29, 2023, REITs account for 70.74% of the total weight in the index, while InvITs constitute 29.25%. This distribution underscores the significant presence of REITs within the index composition, reflecting the prominence of real estate investments in the Indian market.