The decision of the Securities & Exchange Board of India (Sebi) to reclassify real estate investment trusts (REITs) as equity-related instruments with effect from January 1 is seen as an enabler for mutual funds, but experts said limited supply and low returns may come in the way of getting meaningful inflows into this asset class.
Noting that it is at a very early stage, Madhu Nair, CEO of Union Mutual Fund, said the move is big as it gives fund houses more liberty in terms of mandates that they can invest in another asset class.
What did Madhu Nair say?
He said: “It’ll take time for flows to come as we will have to test the markets, but higher demand will lead to increased volatility and lowering of yields. Having said that, given the asset class’s current properties of lower volatility and fixed income-like predictability, early adopters will be schemes like hybrid, multi assets, and even SIFs.”
“We will evaluate it as an independent asset class and expect more products to be developed,” Nair said.
Indistry experts on REITs vs Real estate companies
Another industry expert said in the last few years, real estate companies have outperformed REITs in terms of returns.
However, Abhishek Bisen, head of fixed income at Kotak Mahindra AMC, said, “We are selectively positive on REITs as an asset class as these instruments provide investors exposure to real estate without direct ownership and have strong regulatory mechanisms for investor protection.”
“Increased institutional participation will deepen the market, improve price discovery, and potentially reduce volatility. Reclassification also creates possibility of inclusion in equity indices which will improve liquidity through passive flows. However, as per the Sebi circular, any index inclusion shall be carried out only after six months i.e, July 1,2026,” Bisen said.
The Nifty Realty rose more than 200% in the past five years. In comparison, Embassy REIT has risen 43.2% since its listing in March 2019 and Brookfield India REIT gained 21% since it got listed in 2021. Mindspace REIT has risen nearly 70% since August 2020 and Nexus Select Trust by 64% since May 2023. Knowledge Realty Trust, which was listed in August this year, has risen 19%.
In the circular issued last Friday, the regulator said with REITs becoming equity assets, debt funds will no longer be able to invest in them. Sebi said their holdings as of December 31, 2025 will be grandfathered, while nudging them to liquidate the holding over a period of time and that these can be added to the equity indices only after July 1, 2026.
According to experts, these instruments are less likely to be added in the benchmark indices anytime soon due to their size.