In the Indian investment landscape, infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) have steadily gained traction and are finding a place in investors’ portfolios. Broadly, investors have expressed satisfaction with the performance of these business trusts. Since their inception in India, the evolution of these asset classes has been remarkable, with significant improvements in their structure and regulations, bringing clarity and confidence among stakeholders. Over the years, these trusts have expanded across diverse infrastructure sectors such as roads, power, telecommunications, commercial real estate and more. Looking ahead, the industry anticipates including assets belonging to other sectors such as airports and warehouses under these investment vehicles.
Investor experience
In recent years, the operational performance of InvITs and REITs has consistently improved. The investor experience has been favourable regarding governance, quality of sponsors, underlying assets, distribution yield and overall stability.
Moreover, these asset classes have developed into a platform that addresses the needs of diverse investor categories, including companies, pension funds and private equity players. For example, alternative investment funds such as 360 One are utilising this investment channel to expand their portfolios. 360 One has also raised funds amounting to Rs 16 billion for investments in InvITs, highlighting the growing appeal of these instruments.
In recent years, good governance, high quality infrastructure assets and a conducive tax regime have delivered consistent and predictable cash flows. This performance has successfully aligned with stakeholder expectations. Notably, the road sector has emerged as a standout performer, in terms of meeting investor expectations and attracting significant global interest.
CPP Investments, a leading pension fund manager, has established a portfolio of over $2 billion in InvITs in India. A substantial portion of this portfolio is concentrated in the road sector. The fund now holds a nearly 60 per cent stake in the Interise InvIT, valued at approximately $1.1 billion. It also owns a 25 per cent stake in the National Highways Authority of India’s (NHAI) InvIT, with the remainder of its investments in the Powergrid InvIT.
In 2021, Cintra entered into a strategic partnership with IRB Infrastructure Developers by acquiring a 25 per cent stake in the company through a preferential equity share issuance. Further, Cintra secured a 24 per cent stake in IRB’s private InvIT from GIC. Leveraging its expertise in the road sector and recognising the growth potential of IRB’s portfolio, Cintra has identified this as a highly promising investment opportunity. For Cintra, this investment has yielded exceptional returns, exceeding the company’s expectations and underscoring the strong potential of investment in the road sector. Additionally, with 51 per cent of the contribution coming from IRB, around 25 per cent from GIC and the remaining 24 per cent from Cintra, there is no anticipated dearth of capital that may hinder growth.
Investor concerns
A key challenge for InvITs is their limited liquidity and low trading activity on the stock exchanges, which can dampen investor interest. Despite liquidity being a crucial factor for investor interest, there are currently 19 privately listed InvITs that rarely witness any trade on exchanges. However, the recent reduction in the minimum ticket size to Rs 2.5 million is expected to boost trading activity in these instruments over the course of time.
To encourage greater investor participation, there is a need for increased research coverage of these instruments, stronger involvement from brokerage firms, and more detailed information disclosures by InvITs. Additionally, providing clear guidance to investors could also play a crucial role in sustaining investor interest. This strategy has led to the success of REITs, which received significant research attention, brokerage activity and investor interest due to their publicly listed status.
Inadequate classification of assets and sudden shifts in regulations can discourage foreign investors from investing. The most significant issue is the excessive litigation surrounding taxation and the subjectivity of rulings. Ultimately, this leads to an increase in India’s cost of capital and a higher risk premium, which is detrimental to the nation and the asset market as foreign investment declines.
Additionally, there is a need to institutionalise a claim dispute mechanism to address disputes between concessioning authorities and concessionaires in this space. For example, a dedicated body could be set up to address claim disputes and settlements in concession agreements.
Success drivers
Regulatory support has been an essential factor for the success of InvITs and REITs. The combination of adopting global best practices and the regulator’s continued attention to stakeholder suggestions has boosted investor confidence. For example, unit holders in InvITs and REITs have the statutory right to nominate a director, demonstrating the regulators’ focus on the interests of investors.
Since InvITs and REITs operate in diverse sectors, regulations have been crafted in a manner such that the framework can cater to all infrastructure sectors, ensuring uniformity. This consistency effectively addresses the interests and requirements of all stakeholders. The recently introduced small-medium (SM) REITs, which involve fractional ownership of properties, are expected to engage a completely new group of investors. The ability to cater to such a diverse range of investors and asset pools under the asset class has significantly contributed to the overall success.
Stakeholder expectations
Alongside long-term investors such as international pension funds and companies, the reduction in lot sizes is expected to broaden investor participation. Growing interest from mutual funds, insurance companies and private funds will create an investor segment that will actively trade in these instruments. This mix of steady long-term investors and active traders will enhance liquidity in the asset class.
The regulator is also expected to provide clearer guidelines on which asset qualifies as infrastructure or real estate. Rather than relying on a simple list-based classification, the new approach is anticipated to adopt a more comprehensive and qualitative framework.
In the road sector, as assets mature, associated risks decline due to stable traffic expectations. Larger players are expected to take on newer assets and eventually pass them on as they mature to investors who prefer lower risk at slightly lower internal rates of return. This will rotate the capital and assets within the market and consequently free the capital for further investment in fresh assets.
Currently, key players in the market, such as Cube Highways and Brookfield, are large institutions that are well governed and have high quality sponsors. However, to deliver growth to investors, they must focus on acquiring new assets. As the market distress lessens, leading platforms are concentrating on NHAI’s toll-operate-transfer projects, competing aggressively to secure road contracts by putting forth their best offers. While a significant portion of the country’s developed infrastructure, including state and municipal assets, remains untapped by the InvIT market, these assets represent promising growth opportunities and are expected to be incorporated in the future.
Another potential development is that companies operating in the infrastructure space at a smaller scale may pool their assets to get listed under InvITs. For instance, like SM REITs, smaller-scale infrastructure companies operating in specific regions or sectors such as warehousing might seek to be listed as InvITs.
Future scope
Looking ahead, the airport sector is expected to develop significant potential to come under InvITs and deliver attractive returns. Similarly, the transmission and energy sectors are witnessing considerable investment in newer projects, enhancing their growth prospects. Digital infrastructure also presents promising opportunities for future development. While the road sector has already provided promising returns, a comprehensive evaluation of internal rates of return will be critical for ensuring sustainable growth in new and emerging sectors. w
Based on a panel discussion between Sudhakar Mallya, Principal, CPP Investments; Abhishek Mani, Chief Financial Officer, Cintra India; Amar Merani, Chief Investment Officer and Head, Real Assets, 360 One Asset and Wealth Management Services India; Kranti Mohan, Partner (Head – REITs and InvITs), Cyril Amarchand Mangaldas
