REITs and InvITs: Explained
There's a cool new instrument in the stock market. Read on for a deep dive into it!
“Come next week, InvITs and REITs will be part of NSE indices such as NSE 500 and Nifty Midcap 150. This will boost the volume of investment in these instruments.”
Every word bounced straight over your head, right?
Well, let’s break it down.
What if we tell you that you could be an investor in the businesses of telecom, power transmission, housing real estate or business parks?
Woah, are you guys out of your mind?. These projects are so expensive and risky. Why would I?
Well, what if we tell you that using some magic trick, we could make it affordable, less risky and attractive?
Show us already!
Let’s say a developer Hagrid is developing a new housing complex called the Dobby Housing Complex. Once the Complex is up and ready, he finds himself cash-strapped and feels the need of urgent funds. An angel comes into his life and tells him that they will purchase the Dobby Housing Complex from him.
Now Hagrid’s friend, Luna, also has some construction projects such as Malfoy Mall and Weasley Business Park. Hagrid suggests that Luna sell those properties to the angel. So once the construction is over, she gets done with it.
Hagrid and Luna had invested so much money in their projects. They were so worried about the time it would take for them to get the returns. Thanks to the angel, they got an easy and lucrative exit and they are even more energetic about future projects!
But, who are these angels and what are they gonna do with the assets?
This angel is called a Trust. Real Estate Investment Trust (REIT). They buy properties which are their Murgis (Hen). And these Murgis will give Anda (Egg) called rent. All they have to do is maintain the assets and ensure that the properties are at maximum occupancy.
Now the real question, how do they get all that cash to buy so many projects?
From you. Yes, when they list their REITs on the stock exchange. You buy units in a Real-Estate Investment Trust (REIT) which has investments in assets all over the country! In return, REITs have to distribute 90% of their income as dividends every year.
Easy, right?
Even Infrastructure Investment Trusts (InvITs) work like this. Instead of Real Estate, they invest in Infrastructure projects.
Such huge projects require a lot of funds and arranging money for them is a big task. But by mobilising the investment money of the masses, these trusts solve that problem. This will boost development of infrastructure, which in turn will boost the development of the country.
On the other hand, you, as an investor, don’t have to take much risk because the investment is dispersed across a lot of projects. Yeah, it’s just like Mutual Funds.
Wait. Why haven't I heard about this amazing instrument before?!
Because the regulations came in 2014. The first REIT was listed in India only in 2019. And till date, we just have 3 REITs and 2 InvITs listed on the exchange.
So, these instruments are pretty new. To boost their adoption, new regulations are being made every now and then.
Previously, an investor had to invest in them in the lot size of 200 units at least. This made the instruments inaccessible for a large chunk of the population. But now, there are no restrictions. You can choose to buy as low as only 1 unit!
And now, by including them in indices of NSE, people who buy Mutual Funds that replicate the indices (passive funds), will automatically be buying Reits and Invits. Also putting them into the limelight will increase awareness. This makes them a part of the mainstream investment.
What do you think: Will REITs and InvITs take off finally?
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so informative!