Emerging investment instrument REIT seems to be finally catching investors' fancy, with mutual funds investing a whopping Rs 735 crore in such units in the first six months of 2020, nearly three-fold jump from the year-ago period.
However, mutual funds' investment in infrastructure investment trusts (InvITs) dropped by 8 per cent to Rs 4,968 crore in the period under review, data with the Securities and Exchange Board of India (Sebi) showed.
REITs and InvITs are relatively new investment instruments in the Indian context but are extremely popular in global markets. While an REIT comprises a portfolio of commercial real assets, a major portion of which are already leased out, InvITs comprise a portfolio of infrastructure assets such as highways, power transmission assets.
Overall, mutual funds have increased their exposure in these investment avenues over the past one year.
Investment by fund houses in REITs jumped from a mere Rs 7 crore in January 2019 to Rs 71 crore in January this year and further increased to Rs 402 crore in June 2020.
Fund managers infused Rs 735 crore in real estate investment trusts (REITs) in January-June 2020 compared to Rs 249 crore in the first six months of last year.
Harsh Jain, co-founder and COO of Groww said lowered interest rates post coronavirus is causing more investors to hunt for higher returns in different asset classes.
"Prices in the real estate sector fell down drastically in March. Interest rates were lowered by a significant margin which is now fuelling some investment in the sector. Besides, there was a considerable rise in NRIs looking to buy property in India as well NRIs moving back to India," he added.
"In the case of an REIT which was listed on the bourses last year, the distribution yield on a pre-tax basis was in excess of 8 per cent for the first year and the price of the unit had appreciated by 20 per cent since listing giving a total return of 28 per cent," said Sameer Kaul, MD and CEO, of TrustPlutus Wealth Managers (India).
He further said factors like Work from Home (WFH) may affect the occupancy rates across commercial properties and also the rental rates, resulting in subdued yields from real estate assets.
While mutual fund schemes may invest in such instruments, investors should check that the weightage to these instruments is not excessive in the overall portfolio, he added.
According to Kaul, investors should also factor in the promoter background and whether the promoters have raised any debt against the REIT units. Sometimes, block sale of promoter units or sales done to repay debt can impact the price and hence the capital returns from these units.
The investment in InvITs rose from Rs 611 crore in January 2019 to Rs 908 crore in the same month this year and thereafter to Rs 968 crore in June 2020.
As compared to last year, fund managers' investment in InvITs declined to Rs 4,968 crore in January-June 2020 from Rs 5,400 crore in the first six months of 2019.
Kaul pointed out that several debt and hybrid mutual funds have seen an increase in their AUMs predominantly under the dividend payout plan during the last few years. As per the mandate of these schemes, it is endeavoured to make regular payouts to investors at periodic intervals.
Under the Sebi regulations, REITs and InvITs need to distribute a minimum of 90 per cent of their cash flows to unit holders. This makes them an attractive instrument for debt and hybrid mutual funds given the regular payout by these instruments, he added.
"Also, in the case of REITs, yields are currently in the range of 7.50-8 per cent. In the case of InvITs the yields are in double digits. This further increases the attractiveness of these instruments for debt and hybrid mutual funds in the current environment where the RBI has been cutting interest rates and has announced several liquidity enhancing measures which have resulted in yields coming off significantly across tenures for high quality papers," Kaul said.
However, he believes an economic slowdown could affect toll collections which in turn would impact InvITs comprising a portfolio of roadways or highways.
Sebi first issued the guidelines for REITs and InvITs in 2014, and revised them in 2016 and 2017.
However, mutual funds, which are investment vehicles made up of a pool of funds collected from a large number of investors and invest in stocks, bonds, money market instruments and similar assets, were allowed to invest in REITs and InvITs in February 2017.
The move was part of markets watchdog Sebi's effort to get more number of investors into such instruments.
Ever since Sebi introduced InvITs, markets witnessed the listing of two public InvITs -- IRB InvIT Fund and India Grid Trust. Some InvITs -- IndInfravit Trust, India Infrastructure Trust, Oriental InfraTrust and Tower Infrastructure --- were privately placed.
On the other hand, Embassy Office Parks REIT and Mindspace REIT are the only two listed real estate investment trust.