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Unlocking Real Estate Opportunities through REITs & InvITs: Budget 2024

15 February 20246 mins read by Angel One
India's Budget 2024 boosts infrastructure and real estate sectors with increased spending and the promotion of REITs and InvITs, aiming for economic growth through strategic investments.
Unlocking Real Estate Opportunities through REITs & InvITs: Budget 2024
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India’s economic development is deeply intertwined with its vital infrastructure and dynamic real estate industry. The real estate sector contributed 7.3% to the GDP in 2022 and is predicted to grow to a $5.8 trillion industry by 2047, making up 15.5% of the GDP. Research from the Reserve Bank of India suggests a high return on infrastructure investment, with every ₹1 invested generating between ₹2.5 to ₹3.5 in GDP. Recognising their importance, the Indian government significantly increased its infrastructure spending to ₹11.11 trillion For FY 2025. 

This hike in funding, along with the introduction of innovative financing mechanisms such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), is poised to significantly influence the future direction of India’s real estate and infrastructure sectors. But before diving into the investment dynamics of these instruments, let’s start with the basics.

What are REITs and InvITs?

A Real Estate Investment Trust (REIT) is a collective investment scheme akin to mutual funds, specifically for real estate holdings. These entities acquire and manage a portfolio of real estate assets from which they earn rental revenue. This income is then distributed to the investors, offering them a stream of earnings. REITs present an appealing avenue for investors seeking regular income with moderate risk, allowing for diversification within the real estate sector.

On the other hand, Infrastructure Investment Trusts (InvITs) operate on a similar principle as REITs, gathering funds from investors to invest in income-generating infrastructure assets. These can include a variety of projects like roads, energy plants, and transmission lines. InvITs provide returns to investors through dividends, interest, and capital appreciation. They offer an accessible path for individuals to invest in large-scale infrastructure projects with income potential from the appreciation of assets and operational cash flows, contrasting with REITs, which primarily yield rental income from property investments.

REITs and InvITs Investments in India

In India, REITs and InvITs are significant investment avenues in the real estate and infrastructure sector. As of October 31, 2023, 4 REITs and 22 InvITs are publicly listed in India.

Top REITs and InvITs in 2024

Name Sub-Sector Market Cap (₹ in crores) Close Price (₹) PE Ratio (x) Dividend Yield (%)
POWERGRID Infrastructure Investment Trust Power Transmission & Distribution 11,516.95  96.2 -59.02  18.98 
Shrem Invit Roads 4,060.89  116 8.39  12.53 
Mindspace Business Parks REIT Real Estate 20,155.50  334.77 71.07  11.85 
Indinfravit Trust Roads 6,266.15  101 -15.64  10.95 
Nexus Select Trust Real Estate 19,545.02  129.01 -6625.43  6.97 
Brookfield India Real Estate Trust REIT Real Estate 9,717.19  253.5 74.05  6.39 
Embassy Office Parks REIT Real Estate 32,216.06  362.5 63.67  5.43 
India Grid Trust Power Transmission & Distribution 9,591.90  132.33 21.05  2.41 

Note: The above list of REITs and InvITs is dated February 13, 2024. These stocks are sorted from highest to lowest based on the dividend yield. 

To comply with SEBI’s regulations, Indian REITs and InvITs must allocate at least 80% of their investments to income-producing commercial real estate. Up to 20% of the balance may be invested in a mix of stocks, bonds, cash reserves, or commercial properties under development. 

Furthermore, they must distribute at least 90% of the income generated from rentals to their investors as dividends or interest. Additionally, for REITs and InvITs to operate in India, they must be listed on the stock exchange.

The structure of REITs and InvITs is designed to ensure the efficient management and operation of the trust, comprising a sponsor, manager(s), and a trustee.

Taxation of REITs and InvITs in India

Starting from the financial year 2023-2024, the taxation rules for REITs and InvITs in India have seen some updates while maintaining the core structure:

  • Capital Gains Tax: The short-term capital gains tax remains at 15% for units held for less than 3 years. For units held longer, the long-term capital gains tax is 10% on earnings above ₹1 lakh.
  • Interest Income: This continues to be taxed according to the individual’s tax slab.
  • Rental Income: Rental income tax also remains unchanged, adhering to the individual’s tax slab rates.
  • Dividend Income: The tax treatment of dividend income stays the same. It is taxed according to the individual’s tax bracket if the distributing Special Purpose Vehicle (SPV) opts for the reduced corporate tax regime under section 115BB. Otherwise, this income remains tax-exempt. 
  • Loan Repayment: Before the 2023 Budget, there was no clear tax implication on loan repayment, leading to a tax-free assumption. The 2023 Budget initially proposed taxing such income under “income from other sources” at the individual’s tax rate.

Following feedback from the industry, a revision was made in 2023. Now, if the cumulative loan repayment from the date of issue surpasses the issue price, it’s taxed as “income from other sources” according to the tax slab.

If the total loan repayment to date is less than the issue price, then it’s treated as capital gains at the point of sale. In effect, the loan repayment amount is subtracted from the acquisition cost, impacting the capital gains calculation at the time of sale.

For example, suppose a REIT or InvIT had an initial offering price of ₹100 and distributes ₹20 as capital repayment in 2024. In that case, this distribution is not taxable as it is below the issue price. However, if the cumulative distribution later reaches ₹110, ₹10 becomes taxable for the unitholder. If distributions increase to ₹130 in a subsequent year, then ₹20 is taxable, accounting for the ₹10 already taxed previously.

NIFTY Index for REITs and InvITs

NSE Indices introduced a novel index to monitor the collective performance of publicly traded REITs and InvITs. The allocation of securities within this index will be based on their free-float market value, with a cap of 33% for individual REITs or InvITs and a collective cap of 72% for the top three securities. As of March 31, 2023, the index comprises six securities, with Embassy Office Parks Reit leading at a 33% weightage, followed by Powergrid Infrastructure Investment at 20%.

Introducing this index is anticipated to provide investors with a simplified method to track the performance of these emerging investment options, potentially increasing awareness and drawing new investors to the field.

The index, which was established with a baseline date of July 1, 2019, and a base value of 1000, is set to undergo quarterly reviews and adjustments. The index has experienced a -1.74% return over 2023 and a 10.5% return since its inception.

REITs vs InvITs

Aspect REIT InvIT
Investment Area Focuses on real estate like offices, malls, etc. Targets infrastructure like roads, power projects, etc.
Minimum Investment Primary Market (IPO): ₹10,000-₹15,000. Secondary Market can be purchased at the closing price. Primary Market (IPO): ₹10,000-₹15,000. Secondary Market can be purchased at the closing price.
Income Source Rents from property tenants. Operational project revenues, like tolls.
Risk Factor Lower due to stable tenants and leases. Higher due to development delays and regulatory risks.
Investor Knowledge More familiar, leading to higher retail involvement. Less familiar, resulting in lesser retail involvement.
Liquidity Higher due to more accessible unit prices. Lower, less known among investors.
Asset Ownership Owns or leases real estate assets. Shares infrastructure asset ownership, returned post-project.
Growth Potential Higher, can upgrade or expand properties. Limited, relies on project revenues and bidding success.
Regulatory Authority Governed by SEBI’s 2014 Real Estate Investment Trust Regulations. Overseen by SEBI’s 2014 Infrastructure Investment Trust Regulations.
Listing Requirement Must be listed publicly. Can be public or private, listed or unlisted.

Wrapping Up

When deciding between REITs and InvITs, consider your investment goals and risk tolerance. REITs are generally more liquid and considered lower risk, suitable for those seeking stable investments. InvITs focusing on infrastructure, might offer higher returns but are more susceptible to political and regulatory changes. 

Researching the trusts’ asset quality and credibility ensures steady returns. Both investment types offer accessible real estate investments supported by regulatory bodies like SEBI to benefit investors and national infrastructure. Opt for the one that aligns with your financial strategy and risk appetite. So, what you’re waiting for? Explore the top REITs and InvITs with Angel One. Open your Demat account to start investing today.

Disclaimer: This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.

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