REITs invest in commercial real estate, and 80 per cent of the underlying assets must be completed in rent-generating properties. The remaining 20 per cent can be in other instruments such as cash, under-construction properties, etc. They earn their revenues from rental income, which the properties generate and have to distribute 90 per cent of their cash flows to its investors at least once in six months.
A publicly InvIT invests in infrastructure projects. The projects can be in sectors such as transport (road, bridges, railways), energy (electricity generation, transmission, distribution), communication, and so on. Even InvITs have to distribute 90 per cent of their income to its investors. “Apart from being difficult to understand for retail investors, each infrastructure project can have its own set of challenges,” says Bhavesh Sanghvi, chief executive officer, Emkay Wealth Management. He points out that cash flows in InvITs are less predictable as they are dependent on various factors such as capacity utilisation, scalability of tariffs, and so on.
Infrastructure projects are also tightly regulated. Any regulatory changes can impact revenues. Some projects may depend on government concessions. Many infra projects follow the build-operate-transfer model, which means the operator has to return them to the government. They could also be subjected to re-bidding process after some years. “For such kind of risks, I would expect at least 300-400 basis points higher returns than government securities, which is not the case,” says Sanghvi. He feels that liquidity could also be an issue in infra projects and that’s why investment in InvITs is more suitable for high networth individuals, pension funds, which have the capability to stay invested for long tenures.
For an investor, it’s easier to analyse the underlying assets in REITs. If the property, for example, is A-grade and located in a metro like Bengaluru where the demand is still high, it can be attractive. Assets in tier-II cities may not be lucrative. The list of tenants also says a lot about the properties. “In REITs, there is also the predictability of cash flows as they are leased out for long-term and revenues are stable,” says Jain.