Sebi move opens up REITs and InVITs to retail investors
3 min read.Updated: 25 Apr 2019, 05:59 PM ISTNeil Borate
Sebi has reduced the minimum subscription limit for REITs from Rs2 lakh to ₹50,000, and for investment trusts (InVITs) from ₹10 lakh to ₹1 lakh
REITs and InVITs are long-term assets which can serve retail investors well
In a move that will open up real estate investment trusts (REITs) and investment trusts (InVITs) to retail investors, capital market regulator Securities and Exchange Board of India (Sebi) has reduced the investment limits in these instruments. Through a circular issued on 23 April, Sebi reduced the minimum subscription limit for REITs from Rs2 lakh to ₹50,000, and that for investment trusts (InVITs) from ₹10 lakh to ₹1 lakh. Those with investments worth less than ₹2 lakh are considered retail investors in India’s capital markets.
What are REITs and InVITs?
REITs invest in commercial real estate. They earn rental income from their holdings which is passed on to investors. It has to distribute 90% of its cash flows to investors at least once in six months. Investors also benefit from capital appreciation in the underlying assets.
An infrastructure InVIT invests in infrastructure projects and has a similar structure. “REITs and InVITs are good substitutes for physical real estate," said Vinit Iyer of Wealth Creators Financial Advisors, a Pune-based Investment Advisory Firm. “Physical real estate also typically involves a lot of debt that the buyer takes on. This does not have to happen here, due to the small ticket size," he added.
The income earned by a REITs or InVIT is taxed in the form in which it is received. For example, if a REIT receives rental income, it is taxed as income from house property. Similarly, interest income of a REIT is taxed as interest income (under income from other sources).
Dividend Distribution Tax (DDT) is not payable on REIT dividends.
Earlier, retail investors were only able to take exposure to these products indirectly through vehicles like mutual funds and National Pension System (NPS). Mutual funds, typically, permit exposure up to 10% to REITs and InVITs (see graph). In the case of NPS, exposure to REITs and InVITs is available up to 5% of the pension corpus under Asset Class A, which invests in alternative assets such as REITs, InVITs and mortgage-backed securities.
While IndiaGrid Trust InVIT and IRB InVIT have given negative returns since launch, Embassy Office Parks REIT, India’s first-ever REITs launched in March 2019, gave 9% as on 26 April. These products are still evolving, and it doesn’t make sense to rush into them just yet.