Fundraising Via REITs, InvITs Drops to All-Time Low in FY23 [UPSC Current Affairs]

REITs and InvITs have become less attractive with fundraising hitting an all-time low in 2022-23. In this context, understand the reasons why real estate investment trusts (REITs) and Infrastructure Investment Trust (InvITs) are attracting reduced investments in the FY 2023 and what steps can be taken to reverse this situation. This topic is important for the IAS exam Indian economy segment.

What are REITs and InvITs?

• Real Estate Investment Trust (REIT) is a company that owns and operates a land asset and sometimes, funds income-producing real estate. An REIT comprises a portfolio of commercial real assets.
• InvITs are Infrastructure Investment Trusts composed of a portfolio of assets used for power transmission and roads.
• The capital raised by InvITs consists of money raised through preferential issues, institutional placement, public issues, private placement, and rights issues.

Significance of REITs and InvITs:

• Infrastructure developers can profit from their assets and reinvest the money in new initiatives with the aid of InvITs and REITs.
• Investors receive returns from these products in the form of dividends. Also, the units trade on stock markets, adding liquidity.
• The dividend yield obtained from the underlying assets, thus, represents the return on these assets.
• Because of their favourable dividends and potential for capital growth, these securities are very well-liked by investors seeking passive income on international markets.

Reasons for reduced investments in REITs and InvITs

A change in the tax law regarding distributions that are regarded as repayments could result in a significant rise in tax burden because the investor will be taxed on them as “other income,” which makes the instruments less desirable. REITs and InvITs have also become less attractive due to the following reasons:

• Higher yields on bonds
• Lack of new launches
• Limited awareness among investors
• Volatility in stock markets

What steps can be taken?

• The outlook for fundraising for REITs and InvITs may be muted at this point but could improve if the market stabilizes and fresh opportunities present themselves.
• These instruments can become less appealing as a result of the altered tax laws because of the higher tax liability.
• These assets must produce stronger underlying yields or lower prices to become more appealing.
• To make these assets more appealing than current fixed-income investment options, they will either need to produce stronger underlying yields or lower their price.

First-ever REITs and InvITs Index

NSE indices have launched Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) Index which is the first ever in India.

The New Index:

• The aim of the new index is to track the performance of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) which are listed and traded on the NSE.
• REITs invest in real estate projects and  InvITs invest in infrastructure projects with a long gestation period. 
• The index will be reviewed and rebalanced on a quarterly basis and the weight of the index is based on free-float market capitalization. The base date is the first of July 2019 and has a base value of 1000.
• There is a security cap of 33% each and the total aggregate weight of the top 3 securities is capped at 72%. 
• Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) compose revenue-generating real estate and infrastructure assets respectively.
• The Reits and InviTs are good options for investors to diversify their portfolios to include revenue-generating real estate and infrastructure assets.
• The  Reits and InviTs also help to diversify risk from regular asset classes like equity, debt and gold.
• REITs and InviTs are famous among investors globally and are new to India which can be utilized by mutual funds.
• Mutual funds based on the REITs and InvITs index can be a good option for investors to diversify their portfolio rather than invest in single REITs and InvITs.
• The top constituents of the Nifty REITs and InvITs index are: 
  • Embassy office parks Reit (32.9% weight)
  • Powergrid Infrastructure Investment (20.2%)
  • Mindspace Business Parks Reit (15.3%)
  • India Grid Trust (15.3%).

Conclusion

In India, REITs and InvITs have been aggressively popularised and promoted by the government and the capital markets regulator SEBI. More actions would be needed for expanded investor participation, to address problems, and to realise the full potential of these industries given the significant infrastructural needs across many sectors in India.

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