In the realm of real estate investments, there are two investment vehicles that have recently emerged as some of the best ones – promising both attractive returns and access to previously untapped sectors: Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
While both of these investments allow you to invest in real estate and eventually diversify your portfolio, they do have significant fundamental differences. In this article, we’re going to explore both these investment vehicles, figure out the main differences between them, and understand their respective risk profiles.
Defining REITs
REITs and Real Estate Investment Trusts that allow you to own a slice of commercial real estate without taking on the hassle of being a direct owner. REITs are companies that help you do that.
They are companies that own, operate, and generate income from income-generating commercial properties like office spaces, malls, and hotels. By investing in a REIT, you essentially gain exposure to a diversified portfolio of real estate assets without having to go out and look for properties yourself.
There are several structural features that are unique to REITs:
- Mandatory dividend distribution: REITs are mandated to pay out 90% of their taxable income as dividends to their investors (which is you). This is done to ensure that investors get their due share of regular income flow in return for their investment.
- Investment focus: REITs primarily invest in income-generating properties, which are typically commercial real estate assets like offices, malls, and hotels. REITs cannot invest in houses and other residential real estate even if they wanted to.
- Strict regulatory framework: REITs hardly operate under the radar. They are governed by the Securities and Exchange Board of India (SEBI) Real Estate Investment Trust Regulations, 2014.
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InvITs
InvITs are Infrastructure Investment Trusts that invest primarily in infrastructure projects like toll roads, power transmission lines, and renewable energy assets. By investing in an InvIT, you gain exposure to this basket of large infrastructure projects while also enjoying stable returns generated through user fees, tariffs, and lease rentals.
Key structural components of InvITs:
- Similar mandatory dividend distribution: InvITs also have to pay out 90% of their dividends to their investors as a rule, like REITs. This provides consistent income to investors in the company. This is unlike holding equity in a publicly traded company where you may / may not get dividends every time positive earnings are announced.
- Strictly regulated: SEBI regulates InvITs too, under the SEBI Infrastructure Investment Trust Regulations, 2014.
Also Read: India’s billion-dollar infrastructure industry: How to invest in it?
Main differences between REITs and InvITs
| Feature | REITs | InvITs |
| Investment Focus | Completed and income-generating commercial real estate (offices, malls, hotels) | Operational and income-generating infrastructure projects (roads, power, renewables) |
| Underlying Assets | Established properties with stable leases and rental income | Diverse projects at different stages, generating income through user fees, tariffs, and lease rentals |
| Volatility | Relatively lower due to established real estate assets and longer lease terms | Relatively higher due to project risks, regulatory changes, and dependence on user fees/tariffs |
| Minimum Investment | Varies depending on the REIT, but generally higher than InvITs (Rs. 10,000 – 50,000+) | Varies depending on the InvIT, but generally lower than REITs (Rs. 5,000 – 10,000+) |
| Liquidity | Lower liquidity compared to listed stocks, especially for smaller investors | Can have varying liquidity depending on the size and maturity of the InvIT |
| Regulation | SEBI REIT Regulations, 2014 | SEBI InvIT Regulations, 2014 |
| Taxation | Lower dividend distribution tax compared to equities | Complex tax implications for dividends and capital gains, requiring professional advice |
| Suitability for | Income-focused retirees, Risk-averse investors, HNWIs with larger capital, Tax-sensitive investors | Growth-oriented investors, Long-term investors (5-10+ years), Institutional investors, Investors seeking portfolio diversification |
| Key Risks | Market fluctuations in commercial real estate (vacancy rates, rental income) | Higher volatility due to project risks and regulatory changes, emerging market complications |
Which asset should you pick?
The investment vehicle you pick depends very much on what your personal risk appetite is. If you’re a risk averse investor who wants to supplement his income with a steady, passive stream, REITs are the best thing for you. This is also true when you think more short-term than long-term.
However, if you’re slightly more aggressive with your investing and want to invest in growth, InvITs are more your style. They will not only help you reduce risk from other risky investments by giving you a consistent dividend income stream, but will also increase your exposure to good real estate projects over the long term.
We encourage you to carefully estimate your personal risk appetite before getting into either one of these investments. If you’re not sure about what to do, we recommend that you consult a real estate investment professional before proceeding. Good luck!
Also Read: Is real estate growth in India sustainable? Opportunities vs Challenges!
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