REITs and InvITs

In simple terms

Buying an office building or a toll road is beyond almost every individual investor. Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) let people own a small slice of such assets by buying units that trade on the stock exchange.

• A REIT owns completed, income-producing property, such as office parks, shopping malls and warehouses, and earns rent.
• An InvIT owns infrastructure assets, such as toll roads, power transmission lines, gas pipelines or telecom towers, and earns tolls, tariffs or fees.

Both are trusts registered and regulated by SEBI, with a manager running the assets and a trustee overseeing them on behalf of unitholders.

How they earn and distribute

REITs and InvITs collect rents or tolls, pay running costs and interest on their debt, and pass most of the remaining cash to unitholders as distributions, usually several times a year. Their regulations require them to distribute most of their distributable cash flows; the exact requirement is set by SEBI and can change.

A distribution can be made up of different parts, such as interest from the trust's underlying companies, dividends, and repayment of capital. The parts are taxed differently, and tax rules change, so check the current treatment each year.

Why distributions can change

Distributions are not fixed like deposit interest. They depend on:

• Occupancy and rents for REITs: tenants leave, rents are renegotiated, new buildings compete.
• Traffic and tariffs for InvITs: toll road traffic can fall short of forecasts; tariff rules can change.
• Debt costs: rising interest rates raise the cost of the trust's borrowing, leaving less to distribute.
• Asset life: some infrastructure concessions end after a fixed period, after which the asset returns to the government, as the real estate and infrastructure lesson explains. Part of each distribution may effectively be returning your capital.

How units trade

Units are bought and sold on the exchange through a broker, like shares. Their price moves with:

• interest rates: when rates rise, investors demand higher yields, so unit prices tend to fall, much as bond prices do, as the fixed income lesson explains;
• the value of the underlying assets and expectations about future income;
• investor sentiment and liquidity, which can be thin for some trusts.

The main risks

Why it matters

REITs and InvITs are often marketed as steady income products, sometimes compared directly with deposits. Understanding where their income comes from, why it can fall and how unit prices behave lets investors decide whether they fit a portfolio, usually as a diversifier between shares and fixed income, rather than as a deposit substitute.

Limitations

Rules on structure, distribution, leverage and taxation are set by regulators and the law and change over time. Individual trusts differ greatly in their assets, debt and sponsors. Past distributions do not guarantee future ones.

Common mistakes

• Treating distributions as fixed income.
• Comparing distribution yields with deposit rates without considering risk.
• Ignoring concentration in a few assets or tenants.
• Forgetting that some payouts return capital from assets with limited lives.

Try it yourself

1. Find a listed REIT or InvIT on the exchange website.
2. From its latest presentation, note its main assets, occupancy or traffic, largest tenants or customers, and debt.
3. Calculate its distribution yield from the last year's distributions and the current price.
4. List the three biggest risks to its distributions.