By Nesil Staney
The Securities and Exchange Board of India’s (SEBI) consultation paper on real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) raised an important question. Should these instruments be given equity classification?
The question is important because while the market regulator treats them as hybrid products, the tax department already gives them equity status. That is, short-term capital gains tax (gains from selling units in less than one year) is at 20%, long-term capital gains tax is at 12.5%.
No wonder, many believe that the answer to SEBI’s question should be a profound ‘yes’. “REITs reclassified as equity will provide safe investment avenue for mutual funds and retail investors,” said Vaibhav Agrawal, chief investment officer of Alternates at Motilal Oswal Asset Management Company.
Agreed Mathew Thomas, Partner at Saraf and Partners, “This move will align REITs with the broader equity market, potentially enabling their inclusion in equity indices and facilitating greater institutional participation.”
A lawyer with Taxmann’s Advisory & Research added that these reforms will empower mutual funds to tap into a broader spectrum of asset classes, thereby deepening market participation in India’s real estate and infrastructure sectors. Of course, giving them equity status would also open doors for them to be included in benchmark indices such as Nifty, Sensex and others.
But there are many who have reservations. As the SEBI’s consultation paper noted, the Association of Mutual Funds in India (Amfi) and the Mutual Fund Advisory Committee (MFAC) believes otherwise.
They have argued that these instruments should be hybrid schemes rather than debt or equity due to difference in the structure related to their cash flows, dividends, half-yearly Net Asset Value (NAV) calculation based on valuation, voting rights limited to certain operational decision and other factors.
The argument for equity is due to capital appreciation and price volatility, with some suggesting that it should be treated as a high dividend yield stock. On the other hand, it also has the stability of holding period return – a feature of fixed income. So, the argument is equally strong on both sides.
Currently, both REITs and InvITs are mandated to distribute at least 90% of their net distributable cash flows to investors. Among other proposals, SEBI also suggested increasing the investment limits for MFs in REITs and InvITs, from 10% of the (equity and hybrid) scheme’s net value (NAV), to 20%. The cap remains at 10% for debt schemes. As of December 31, 2024, there were 115 mutual fund schemes exposed to REITs and InvITs, with total assets (AUM) of Rs 9,00,666 crore.
“This is a favourable suggestion as limits would allow Mutual Funds to allocate more capital to REITs and InvITs, providing investors with broader exposure to these asset classes and diversification of Mutual Fund portfolios,” said Thomas.
Globally, REITs in widely-tracked equity indices include Prologis, American Tower, Equinix, Digital Realty Trust, Ventas, Simon Property Group, Public Storage and Crown Castle. Some of Indian REITs are already in MSCI/FTSE equity indices. The FTSE EPRA Nareit Global Real Estate Index is a widely used benchmark for REITs. Other prominent REIT indices are STOXX Global 1800 REITs, S&P Global REIT Index, MSCI REIT Preferred Index and SPDR Dow Jones International Real Estate ETF.
REITs are in a sweet spot in India, according to analysts at HSBC. They issued a buy call for Brookfield’s BIRET and Embassy Office Parks. “We see REITs as one of the best plays for the rate cut cycle,” said HSBC’s Puneet Gulati and Akshay Malhotra, in a recent report. Embassy REIT with P/E of 22 is 44.6% owned by foreign investors and 20% by mutual funds is the largest.
It has a market capitalization of Rs 36,895 crore. Other top Indian REITs in the order of market capitalization include Data Infrastructure Trust (Rs 44,492 crore), National Highways Infra Trust (Rs 25,856 crore), IRBIT (Rs 25,800 crore), Mindspace Business Parks (Rs 24,000 crore), Nexus Select Trust (Rs 20,450 crore) and CUBEINVIT (Rs 16,000 crore).
Indian REITs have outperformed NIFTY50 in last year. They are firmly back on their growth trajectory, driven by increasing occupancies. “We expect 5-8% NAV growth for our covered REITs in FY26 from marginal rental growth as office spaces reach near optimal occupancies; new completions add to the value growth, said the HSBC analysts.