At present, over 30 infrastructure investment trusts (InvITs), real estate investment trusts (REITs) and small and medium REITs (SM REITs) have been registered with the Securities and Exchange Board of India (SEBI). The regulations governing these trusts have evolved significantly. Given the huge untapped potential in this space, SEBI aims to further enhance infrastructure financing through these business trusts. At a recent Indian Infrastructure conference, Pramod Rao, executive director, SEBI, spoke about the performance of InvITs and REITs, the key initiatives taken by the regulator and the future outlook. Excerpts…
InvITs and REITs have emerged as a universal framework for managing various types of infrastructure and real estate assets. In India, business trusts have been trifurcated into three categories — REITs, InvITs and the newly introduced small and medium REITs (SM REITs).
While this classification has its rationale, it also has a disadvantage. Global databases have primarily focused on the four REITs in India, often overlooking the inclusion of InvITs, which are categorised under the REIT umbrella globally. This has made the Indian InvIT and REIT market appear smaller than it actually is.
Currently, India has over 30 registered REITs, InvITs and SM REITs. In a short span of time, the InvIT and REIT market has grown exponentially, with total assets under management (AUM) approximately Rs 6.5 trillion, indicating significant opportunities and growth potential. By contrast, 1200 alternative investment funds (AIFs) manage assets worth approximately Rs 4.3 trillion.
These investment vehicles have helped facilitate the financialisation and the fractionalisation of real estate and infrastructure assets. The market regulator, SEBI, has implemented a proactive approach to oversee these products, resolve investor grievances and establish a dispute resolution system, providing significant benefits to investors.
These structures are supported by a robust regulatory framework, and inputs from best global practices to design to attract investors and sponsors. The regulatory framework includes a mandate to distribute over 90 per cent of cash flows from underlying assets. It also defines roles for distinct managers and trustees, and independent board members, all of which enhance stakeholder engagement. Furthermore, unlike pooled investment vehicles, such as mutual funds, unitholders of InvITs and REITs are entitled to nominate directors on the board of directors of the investment manager, and to participate in key decisions.
Promoting investor participation
The growing participation of retail investors in the mutual funds (MF) industry highlights an increasing risk appetite among investors. Investor awareness regarding the suitability of these assets for their portfolio will promote broader acceptance of this asset class. However, education efforts should not be limited to retail investors alone.
There is also a significant opportunity to engage professional fund managers. Insurer participation in this space is currently less than half a per cent. These insurers have long-term capital, which aligns well with the long-term nature of these assets. While international investors, including sovereign wealth funds, private equity funds and overseas pension funds from Canada and Germany, have been substantial contributors to InvITs, organisations like the National Pension System and the Employees’ Provident Fund Organisation have not yet adopted a similar approach. The Insurance Regulatory and Development Authority of India has established a cap of 3 per cent of AUM for insurers to invest in alternative asset classes, including InvITs, REITs, municipal bonds and similar alternative assets, providing sufficient headroom until the insurers begin to increase their stakes. Domestic pension funds are still exploring and deliberating this asset class. Going forward, it will be essential to engage, educate and inform this segment of investors.
Furthermore, just as the Association of Mutual Funds in India successfully launched the “Mutual Fund Sahi Hai” campaign to enhance investor awareness, resulting in an increase in AUM from Rs 6 trillion to Rs 60 trillion over a decade, REIT and InvIT associations should adopt similar strategies. The focus should be on fostering institutional efforts rather than solely promoting individual interests.
Mapping the future potential
In India, three REITs focus on commercial real estate, with one specialising in malls. Collectively, they manage approximately 10-12 per cent of Grade-A commercial properties. In contrast, the percentage in the US and Singapore has reached around 50 per cent, indicating significant potential for growth in India. Furthermore, there is growing investor interest in concentrated exposure to specific business districts and assets. SM REITs are well-positioned to facilitate these investments. To support this, SEBI has included these entities under the regulatory framework, paving the way for new players to enter the market and contribute to its expansion.
In the InvIT sector, there are several opportunities, with government-backed assets being monetised. The central government has made progress with the National Highways InvIT and PowerGrid InvIT. However, similar initiatives by state governments have yet to take off. To accelerate this, SEBI is working with certain public sector entities to explore and present the model to several state governments, demonstrating its potential and ultimately setting a precedent for other states to follow.
Another promising opportunity in the InvIT space lies in housing municipal assets under InvITs. Municipalities own a range of urban infrastructure assets, such as roads, water supply systems, drainage networks and sanitation facilities, which could be included in InvIT portfolios.
The third opportunity in the InvIT space lies in attracting corporate houses with significant real estate holdings. Recently, Bharti Enterprises monetised its assets by selling them to the Brookfield-operated REIT. This transaction demonstrates that corporate entities with substantial real estate assets can leverage REITs as a tool for monetisation. The sale and leaseback transactions in the corporate space can unlock significant opportunities for REITs and InvITs.
The fourth opportunity involves individuals who own real assets. REITs can provide a similar option to the National Housing Bank’s reverse mortgage loan product launched over a decade ago. Through REITs and SM REITs, individuals can monetise their real estate assets while continuing to reside in their homes on lease until their passing.
SEBI’s game plan
SEBI is actively pursuing various initiatives in the space. It is encouraging the formation of associations such as the Indian REIT Association and the Bharat InvIT Association to work actively on developing this product by way of investor awareness. The regulator has also suggested that SM REITs establish an association. Education outreach initiatives by these associations could potentially increase participation and maintain momentum within the sector.