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What is Difference between REIT and INVIT?

 Introduction to REITs and InvITs

REITs

Similar to mutual funds, Real Estate Investment Trusts (REITs) facilitate investments into the real estate sector. Here, you can buy and sell units rather than properties, to profit from your investments. If you are looking to invest in the property market without having to buy properties, consider REITs. This structure is governed by SEBI, Real Estate Investment Trusts (REITs) Regulations, 2014, that offers a framework on registration and regulation of REITs in India.

As defined, REITs are used to invest in real estate, such as land and permanently attached improvements to it. However, it does not apply to mortgages or assets falling under the scope of 'infrastructure'.

InvITs

Similar to REITs, InvITs are structures where investors invest money identical to that of a mutual fund. This option was introduced to open up investments in the infrastructure sector. Regarded as a modified version of REITs, InvITs are built to suit specific circumstances in the country.

 

Understanding REIT vs INVIT

For a while now, the real estate sector in India has been pushing to introduce REITs and InvITs. While these were permitted, investors were hesitant mainly due to the uncertainty of the tax treatment of pass. But with the recent clarification by the government on the status of pass-through payments in REIT and InvIT, these structures have become more transparent.

Today, the government has also permitted banks and mutual funds to invest in these instruments, subject to specific predefined elements. To understand the difference between REITs and InvITs, let's look into the specifics of each structure.

 

Similarities between REITs and InvITs 

 

REITs - As a kind of real estate mutual fund, a REIT collects money from investors or unitholders and invests them in real estate projects. The REIT further invest such funds into completed and under construction real estate projects. The returns generated on these real estate schemes are distributed to the investors through dividends. Typically, most REITs are regarded as medium-term development projects.

InvITs - As a slight variation of REIT, InvITs only invest in infrastructure plans with extended tenures. Therefore, a significant road project, highway plan or even a substantial irrigation scheme can attract InvITs for investments. Similarly, the returns generated by infrastructure projects are distributed to InvITs investors through dividends.

 

Types of REITs

  • Equity REITs: These structures generate money when owners lend spaces such as large residential townships, office spaces, shopping malls and the like to tenants on lease. The generated income is then divided among investors through dividends.
  • Mortgage REITs: Under this structure, there is no concept of an owner. This arrangement means the finances taken against debt to develop real estate projects. Typically, mortgage REITs generate income through EMIs that are further distributed among investors through dividends.

 

Deciphering REITs structures

Under the Indian Trusts Act, 1882, REITs are set up as trusts registered with the SEBI. This structure involves three parties. They include:

  • Trustees – These are individuals who oversee activities within the REITs. They are registered debenture trustees that are not associated with the sponsor.
  • Sponsor - These individuals hold approximately 25% in REITs for the first three years. After the three years, sponsors hold 15% in the REITs. The primary responsibility of the sponsor is to set up the REITs structure and appointed trustees.
  • Manager - A company, LLP or a corporate body that supervises and looks after the day-to-day functioning of the REIT. To qualify as a manager, a manager must have at least five years' experience in addition to other requirements, as specified.

 

Advantages of investing in REITs

  • Secured income through long leases
  • High liquidity
  • Stringent regulations by the SEBI
  • Specialised management
  • Transparency
  • Guaranteed dividend
  • Diversification

To understand how you can benefit from investing in REITs, here are some ways.

  • Income is typically generated from REITs in the form of rent; this revenue is regarded as a guaranteed income.
  • You can purchase REITs just like you do shares in the stock market, but, without the hassle of purchasing actual property or the complications of dealing with real estate legalities.
  • On average, REITs yield approximately 10% per annum for its unitholders, that can be decent returns compared to other investments.

 

A closer look into InvITs

Better known as infrastructure investment trusts, InvITs are relatively similar to REITs. InvITs obtain money from investors to be used as an investment in infrastructure projects to ensure cash flow. Typically, InvITs invest directly or through an SPV into infrastructure projects. However, InvITs can only be done through SPV's in the case of public-private partnership. Just like REITs, InvITs are governed by the SEBI through the SEBI (Infrastructure Investment Trusts) Regulations, 2014 that registers and regulates InvITs. The minimum investment amount in InvITs is Rs. 10 lakh that can be bought in an IPO for ten years or more.

 

Types of InvITs 

  • A public offer of InvITs units is mainly invested in completed infrastructure projects.
  • An InvIT investment in under-construction projects typically goes for a private placement of its units.

 

Deciphering InvITs structures

InvITs are mainly set up as trusts that are registered and regulated by the SEBI. Typically, four parties are involved in an InvIT. These include:

  • Trustee - An individual, who is a SEBI registered debenture trustee.
  • Sponsor - A sponsor can be a corporate body, an individual promoter, a company or an LLP with a net worth of ₹100 crores that has set up the InvIT. Sponsors have to hold InvITs for a minimum of three years unless specified otherwise in the regulatory requirements.
  • Investment manager - A corporate body, company or an LLP that manages all the functionalities and business activities surrounding InvITs is regarded as an investment manager.
  • Project manager - An individual responsible for executing the project, and in the case of public-private partnership, could be an entity assigned to being responsible surrounding the implementation of the project.

 

Advantages of InvITs 

Regarded as providing a suitable structure to finance infrastructure projects in the country InvITs are considered ideal. This is because, if large infrastructure projects under development in India are delayed due to several reasons such as death, finance expenses, frozen equity of private investors and the like, InvITs can come to the rescue. They can:

  • Offer long-term refinancing of current infrastructure projects.
  • Assist in retrieving the developer's capital to be used to reinvest into new infrastructure projects.
  • Help banks from risky loan exposure by taking out the current high cost of debt with long-term, low-cost funds.
  • Assist investors in building diversified investments within the infrastructure industry.
  • Attract foreign funds in the infrastructure sector.
  • Help bring about enhanced standards of governance in the infrastructure arena.

 

Conclusion

Many foreign investors are showing a keen eye in the infrastructure and real estate sector of India. In this regard, REITs and InvITs can be perceived as excellent opportunities for taking advantage of India's developing growth in the industry. These structures also offer a significant prospect for institutional investors to diversify their investments. Given the robust governance REIT protocols set up by SEBI in addition to RERA laws, real estate can work out to be attractive investments for the future.

 

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

Ref: https://www.indianivesh.in/kb-blog/difference-between-reit-and-invit

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