In a landmark move, SEBI has reclassified REITs as equity instruments but what does this really mean for us?
REITs were earlier classified as “hybrid securities” which is basically a mix of debt and equity (InVITs are still hybrid). This move has been brought to align with global practices and for greater inclusion in equity indices and mutual fund allocations.
𝟭) 𝗛𝗼𝘄 𝘁𝗵𝗶𝘀 𝗰𝗼𝘂𝗹𝗱 𝗰𝗵𝗮𝗻𝗴𝗲 𝘁𝗵𝗲 𝗥𝗘𝗜𝗧𝘀 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼?
- REITs will now be eligible for more mutual fund participation.
- There will be increased participation by Institutional and Retail Investors.
- Investors can now view REITs alongside other equity assets which will improve transparency and hence confidence of investors.
- More easily accessible and liquid accelerating their acceptance in Indian portfolios.
𝟮. 𝗡𝗼 𝗙𝘂𝗻𝗱𝗮𝗺𝗲𝗻𝘁𝗮𝗹 𝗦𝗵𝗶𝗳𝘁 𝗶𝗻 𝘁𝗵𝗲 𝗠𝗼𝗱𝗲𝗹
- REITs will still earn and distribute rental/lease income from properties, not corporate profits.
- The product remains about steady yields with moderate growth, not the multibagger returns of equity.
- Taxation stays the same- REITs already enjoyed equity-like capital gains rates.
𝟯. 𝗙𝗗 𝘃𝘀 𝗥𝗘𝗜𝗧𝘀
- FD: 7% interest, but fully taxed at slab rates which translates at 4.9% post-tax for 30% bracket.
- REITs: 5–7% distribution yield + 5–7% capital appreciation
12% potential total returns.
This shows that REITs are in a position to offer much better returns than FD but most of us are not aware.
- There are a few risks involved such as -
1) Valuations are sensitive to interest rate cycles
2) Rental growth depends on demand-supply balance.
𝟰. 𝗘𝘃𝗼𝗹𝘃𝗶𝗻𝗴 𝗠𝗮𝗿𝗸𝗲𝘁 𝗼𝗳 𝗥𝗘𝗜𝗧𝘀
- India has only five listed REITs today, versus dozens in mature markets like the US or Singapore.
- The future though looks promising with retail malls, warehouse and even data centres lining up.
- Tier-2/3 cities could become the next growth hotspots as organised retail and GCCs expand.
𝟱. 𝗡𝗲𝗲𝗱 𝗼𝗳 𝗮 𝗥𝗼𝗯𝘂𝘀𝘁 𝗠&𝗔 𝗙𝗿𝗮𝗺𝗲𝘄𝗼𝗿𝗸
- Compared to the well-developed M&A and corporate action framework for listed equities, the regime for REITs and InvITs is still nascent.
- REITs/InvITs are governed by SEBI’s 2014 regulations.
- SEBI Regulations do not adequately address modern, complex trust-level mergers
What’s needed?
1) A dedicated takeover code for REITs/InvITs defining open-offer triggers, control and sponsor transition rules.
2) Clear provisions on promoter/de-promoter status to ensure smooth exits.
SEBI’s reclassification of REITs is a strong step towards making them more attractive for investors. Yet, the journey is far from over, especially with the need for a robust M&A framework to support scale and consolidation.
For Comment _
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