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Why REITs and InvITs Aren’t Worth It (Yet) 🏗️

10x - that is how much growth was seen in the money invested into REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) in 2023

With the hype behind development in the country, it is no wonder these trusts have started to gain popularity since it allows you to directly reap the benefits of a particular real estate or infrastructure project!

Yet, the exuberance behind these so-called-sexy instruments might go limp as soon as you compare the best-performing REIT and InvIT against the Nifty Real Estate and Infrastructure indices.

While the indices gave a whopping 81% and 38% respectively, the Embassy REIT and IndiaGrid InvIT gave negative returns!

Clearly there seems to be a huge gap in how the industries have performed and how these REITs and InvITs haven’t, making them look far less exciting.

Hence, the question that arises is this - should you not invest in these and will it ever get better?

Why You Should Avoid REITs and InvITs

REITs and InvITs, in theory, are cool instruments since you gain direct access to the income the trust gets from renting an office building or the toll paid on a highway! Yet, this asset class still seems to have issues:

The cumulative effect of these pain points make these instruments look unworthy of allocation, at least in a sizable way - but that doesn’t seem to be stopping institutions from buying these REITs and InvITs in bulk, bringing the yearly inflow back to pre-COVID times by the end of 2024!

So, is this where the “yet” from the blog title kicks in?

Will It Get Better?

The country has been trying its best to improve the image of REITs and InvITs:

  • Government has been pondering upon a change in regulations to formalise and standardise the process of investing in them and the framework to calculate DPUs and its taxation so as to simplify it all

  • Mutual fund industry and SEBI are in talks to create a new category for REITs and InvITs as it expects to see further traction once more number of REITs and InvITs are launched

  • Major real estate companies like DLF and Godrej plan to launch massive residential REITs, and the infra space will see big solar players and the National Highway Authority of India joining the InvIT game to finance projects

While all these points do sound positively interesting, it is yet to tackle the pain points mentioned above, making REITs and InvITs still look unappealing - so where can you put your money?

What Are The Alternatives?

Hence, while the asset class looks glum now, it might pique your fancy at a later date when more options of better managed REITs and InvITs are available for your perusal, but until then, what are the alternatives?

  • Equities - Investing in real estate and infra stocks and ETFs are definitely better since they are more lucrative from a capital gains perspective, have more potential to grow their portfolios, are more liquid, have more options available (as opposed to the 6-7 investible REITs and InvITs), and are easier to comprehend from a business and tax perspective

  • Bonds - REITs and InvITs are seen as competitors to bonds as they offer similar yields. But, with the expectation of rate cuts this year, bonds might be more attractive as the price of older-issued bonds at those higher rates will increase (since those are coveted compared to the newly issued, lower interest rate bonds), making this a better place to park funds

Now equities aren’t perfect, since real estate and infra stocks come with a hoard of corporate governance issues and timing these cycles are difficult! Even bonds have higher barriers of entry when it comes to the minimum investment size, making this unattainable to a certain section of investors.

The solution? Mutual Funds. With options like the HDFC Housing Opportunities Fund (51% return last year) and the ICICI Prudential Infrastructure Fund (60% return last year) being made available that counteracts all 3 of the pain points found in REITs and InvITs, mutual funds hi sahi hai!

🏗️ “Everything that shines isn’t gold” is quite the apt remark with regards to the REITs and InvITs. With better areas to place your funds until this space is better suited to make investors truly interested, Rupeeting says, “drop it like its hot”, and wait to see what is in store for the asset class in the future!

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