Real estate investment trusts (REITs) are a relatively new investment vehicle in India, but they have quickly become an essential part of the country’s financial landscape.

REITs offer several advantages over traditional real estate investments, including diversification, liquidity, regular income, and professional management. REITs help investors capitalise on this demand by providing them with a way to invest in real estate without owning and managing physical properties. These investment vehicles are listed on stock exchanges, which make them easy to buy and sell. And as per the law, these funds are mandated to distribute at least 90 per cent of their taxable income to shareholders, which make them a better investment option.

Foreign investors and REITs

Foreign investors can participate in REITs in India. In October 2021, the Reserve Bank of India amended its regulations to allow foreign portfolio investors (FPIs) to invest in the debt securities issued by REITs and infrastructure investment trusts (InvITs).

The maximum holding of an FPI in a single REIT is 10 per cent of the total issued capital of the company. The aggregate holding of all FPIs in a single REIT cannot exceed 40 per cent of the total issued capital of the company.

Further, to invest in these companies through the debt market, FPIs need to obtain a registration from the RBI. The registration process is relatively straightforward and can be completed online. Once an FPI is registered, it can then invest in REITs through any of the authorised dealers (ADs) in India. The investment in REITs through the debt market is a relatively new development, and there are still some challenges that need to be addressed. For example, the liquidity in the debt market for REITs is not as high as it is in the equity market.

On the whole, the recent changes to the RBI’s regulations make it easier for foreign investors to participate in REITs in India, which will help attract more foreign investment into this sector.

Gaps in REIT policies

There are a few gaps in the existing REIT policies in India. The minimum corpus requirement is on the higher side which makes it difficult for small and medium-sized real estate companies to establish REITs.

The current regulations do not allow REITs to invest in certain real estate types, such as residential properties, which limits the investment options and reduces their potential for diversification. Moreover, there are some tax disincentives for investing in REITs in India.

Dividends paid by REITs are taxable in the hands of the investor according to the applicable slab rate. This can make REITs less attractive than other investment options for some investors. The REITs market in India is still relatively illiquid and buying and selling REIT units at a fair price could be difficult.

The government is considering reforms to the REIT policies to make them more investor-friendly. Possible reforms including reducing the minimum corpus requirement, permitting these entities to invest in a broader range of real estate assets and providing tax incentives and the like. These reforms, if implemented, would make REITs a more attractive investment option for individual investors.

Saravanan is a Professor of Finance and Accounting at IIM Tiruchirappalli, and Williams is a project manager – ESG at Good Vision Seva Trust

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