The 90% payout mandate: Why this ‘real asset’ class is beating traditional dividend stocks

First, in general, PSU stocks trade at relatively lower valuations, which reduces downside risk.

Second, PSUs generally have higher dividend payout ratios.

Third, in several cases, PSU stocks offer dividend yields that, at times, are meaningfully closer to or even higher than FD rates.

For income-focused investors, that combination naturally becomes attractive. But here’s the catch.

Dividend payments can be irregular due to commodity cycles, economic slowdowns, policy changes, or periods of weak government spending. For example, the RBI restricted banks from announcing dividends during the COVID-19 pandemic, and the restrictions were relaxed after two years.

That is the challenge with relying only on traditional dividend stocks for income.

And, this is exactly where REITs—Real Estate Investment Trusts become interesting.

But what exactly are they, and why are they increasingly becoming part of income-focused portfolios?

Understanding the REITs Structure

Simply put, you can think of a REIT as a pooled investment vehicle that owns income-generating real estate assets such as office parks, business centers, hotels, and malls.

The commercial properties are then leased to companies, and the rentals earned from tenants form the primary source of cash flows for the trust.

Examples of listed REITs in India:

• Knowledge Realty Trust
• Embassy Office Parks REIT
• Mindspace Business Parks REIT

REITs are relatively new asset classes in India compared to stocks. This is one reason many investors are still unfamiliar with how REITs work.

But at a basic level, it allows you to invest in income-generating real assets without directly owning them.

A Growing Income Alternative Beyond Stocks

India’s tryst with REITs started in 2019 when Embassy Office Parks REIT became the country’s first listed REIT.

Since FY20, the total market capitalization of listed REITs has increased six times- from ₹22,000 crore to ₹1.74 lakh crore, as of 12th May 2026. During the same period, the market has evolved from just one listed REIT to five.

Gradually, they are emerging as a serious income-generating alternative within the Indian market.

Some of these REITs offer a distribution yield ranging from 5% to 7%, significantly higher than the roughly 1.3% dividend yield of the Nifty 50.

REIT Distribution Yields in India

	FY26 Annual Distribution (₹)	Current Price (₹)*	Distribution Yield (%)
Embassy Office Parks	25.28	422	6.0
Mindspace Business	24.09	457	5.3
Brookfield India	21.4	326	6.6
Nexus Select	9.08	157	5.8

Payouts from REITs are not termed as dividends, but as distributions, because it includes multiple components, such as interest income, dividends, and loan repayments.

The combination of relatively higher yields and recurring distributions is one of the key reasons why REITs are attracting income-focused investors.

Why Yields are Higher in REITs?

REITs operate with a very different business structure.

They are designed primarily to generate stable rental income from income-producing real estate assets such as office parks, malls, and commercial properties.

One of the biggest differences between REITs and normal companies is the payout structure. While most companies retain a large portion of profits for expansion and other business activities, REITs are required to distribute most of their cash flows to investors.

SEBI regulations require REITs to distribute at least 90% of their Net Distributable Cash Flows (NDCF) to unitholders.

NDCF refers to the cash available for distribution to investors after accounting for operating expenses, interest costs, and other permitted adjustments.

Because a large portion of cash flows is passed on to investors instead of being retained within the business, REITs generally offer higher yields compared to traditional equities.

Why REIT Cash Flows Are More Predictable

Large office spaces owned by REITs in India often operate with occupancy levels above 85-90%, with tenants including MNCs, IT firms, Global Capability Centers (GCCs), and financial institutions. This creates relatively stable and predictable rental cash flows.

Embassy Office Parks REIT, for instance, has an occupancy rate of 90% with an average lease tenure of 8.5 years.

Because of this stable rental profile, Embassy Office Parks has been able to meet its FY26 distribution guidance.

One more feature of commercial real estate leases is the built-in rental escalation clause. Lease agreements commonly include rental escalations of nearly 10-15% every 3 years, or around 5% annually.

Across the broader portfolio, Embassy’s contracted rental escalation rate is 15% for every three years. This creates visibility for future rental growth and distributions.

Over the last three financial years, the Embassy’s distribution payout increased from ₹21.33 in FY24 to ₹25.28 in FY26, representing nearly 18% growth.

REITs Are Not Just About Yield

REITs are often seen as income-generating instruments, but distributions through quarterly payouts are only one part of the return profile.

The second component is the potential appreciation in the value of your units over time.

This is where the quality of the REIT you pick makes all the difference.

Asset Quality Matters

A REIT is only as good as the assets it owns. Premium Grade-A office assets in key commercial hubs such as Bengaluru, Hyderabad, Mumbai, and Pune generally enjoy stronger leasing demand and better rental growth.

The quality of tenants is equally important. REITs with MNCs, GCCs, and large IT firms as anchor tenants tend to have better occupancy visibility and lower risk in leasing.

Growth Through Expansion

Another key driver is asset expansion.

Over time, REITs might increase their distributable cash flows as they acquire newer office parks and other commercial real estate properties.

This is why sponsor quality and acquisition pipeline matter significantly in long-term wealth creation.

Embassy Office Parks, for instance, is sponsored by Embassy Group and Blackstone, giving it access to a significant development pipeline. Mindspace is sponsored by K Raheja Corp.

The sponsor’s track record, balance sheet strength, and pipeline of ready assets are worth examining before investing.

Debt and Interest Rates

REITs use borrowed money to acquire and expand assets, which means interest rates directly affect their profitability and distributions.

If borrowing costs go up, REITs have less cash to distribute to investors. When rates fall, the opposite happens.

The proportion of floating-rate versus fixed-rate debt determines how exposed a REIT is to this risk.

Fixed vs Floating Debt Exposure in REITs

	Fixed-Rate Debt	Floating-Rate Debt	Interest Rate Sensitivity
Embassy Office Parks	60%	40%	Moderate
Knowledge Realty Trust	20%	80%	High

Knowledge Realty Trust’s high floating-rate exposure means its distributions are more vulnerable during a rising-rate environment compared to Embassy.

However, what matters more is the trajectory, whether debt levels are declining as a proportion of assets, and whether interest coverage ratios remain comfortable. Embassy’s interest coverage ratio for FY26 is approximately 2.7X, meaning it earned 2.7 times what it needed to service interest, a reasonable buffer.

When comparing two REITs, the one with the higher distribution yield is not automatically the better investment.

A REIT with a slightly lower yield but Grade-A assets, diversified blue-chip tenants, a strong sponsor pipeline, and predominantly fixed-rate debt can deliver meaningfully better total returns over a 3 to 5 year horizon than a high-yielding REIT with weaker fundamentals.

The Right Way to Value REITs

When you buy a stock, you might look at the price-to-earnings ratio to judge whether it is cheap or expensive. That metric does not work for REITs.

The primary objective of REITs is not earnings growth. They exist to own assets and distribute the income those assets generate. So the right question to ask is not “how much is it earning?” but “how much are its underlying assets worth?”

That is what Net Asset Value, or NAV, answers.

NAV is simply the value of everything a REIT owns, minus the liabilities.

The market value of the properties is not estimated by the REIT itself. SEBI requires independent, third-party valuers to assess the fair value of the underlying real estate assets periodically.

REIT NAVs are typically revised semi-annually or annually.

Discount to NAV vs Premium to NAV: What It Signals

If a REIT’s units are trading below NAV, it means the market is valuing the trust at less than what its assets are independently worth. This could indicate:

• Caution around occupancy trends or rental growth
• Concerns about interest rate pressure on distributions
• General market pessimism around office real estate demand

If a REIT trades above NAV, the market is paying a premium, typically because investors expect strong future growth, asset quality is perceived as exceptionally high, or distributions are expected to rise significantly.

REITs Valuations: NAV vs Market Price

REITs
	NAV (₹)	CMP (₹)	Discount to NAV (%)
Embassy Office Parks	492	421	14.4
Mindspace Business Parks	527	459	12.9
Brookfield India	387	324	16.3
Nexus Select	164	158	3.7

Most listed REITs in India are trading below their NAV. Embassy Office Parks REIT is trading at more than a 14% discount, while Brookfield India Real Estate Trust trades at nearly a 16% discount.

This generally indicates the market is cautious around factors such as office demand, rental growth, occupancy trends, interest-rate pressure, or valuation methodology used in valuing the assets.

Before investing, one final aspect investors should understand is taxation.

Understanding REIT Taxation

Unlike dividends, REIT distributions are not taxed as a single income stream.

REIT distributions include multiple components, such as interest income, dividends, and repayment of loans. Because of this structure, the taxation of REIT payouts can vary depending on the composition of the distribution.

For example, interest income and dividends are added to your total taxable income and taxed at your applicable slab rate.

Another component is repayment of capital. This cannot be classified as income; hence, it will be deducted from the acquisition cost of REIT units. It can increase capital gains tax when the units are sold later.

Distribution Mix of Knowledge Realty REIT

Consider the recent distribution declared by Knowledge Realty Trust for Q3 FY26. The total distribution stood at ₹1.568 per unit. However, the payout was not entirely a dividend.

The distribution included:

• ₹1.08 as dividend
• ₹0.13 as interest income
• ₹0.35 as repayment of capital
• ₹0.003 as other income

This breakdown is important because each component is taxed differently in the hands of investors.

Choosing Between REITs and PSU Stocks

REITs clearly have an edge over PSU stocks, when it comes to predictable, stable, and growing income. But, that does’t mean, REITs can replace PSU stocks in a portfolio.

Both are very different instrument serving different purposes.

PSU stocks remain a cyclical equity play. Investing in the right sector at right valuations can deliver strong returns through combination of dividends and capital appreciation.

REITs, on the other hand, are structured primarily around recurring cash-flow distribution. For investors prioritising steady quarterly income, REITs are structurally superior.

For income-focused investors, the most sensible approach is not to choose one over other, but use both strategically. PSU stocks for cyclical growth and opportunistic income, and REITs for stable and recurring cash flows.

Disclaimer:

Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Deepan Datta has spent over a decade studying stocks and mutual funds. His passion is to uncover interesting stories in the financial markets and share them through his writings with investors at large. He is focused on delivering clear, easy to understand and research-backed insights. Deepan began his career as a Research Associate at S&P Global, where he developed a strong foundation in financial research and data analysis.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

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