Difference Between REIT and InvIT? Meaning and Types in Detail

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are two instruments that give you an easy entry into the real estate sector without actually owning a physical property or investing a huge sum of money. First introduced in 2014, REITs and InvITs help you earn through capital appreciation and regular income in the form of rent or lease payments. Read on to understand these two financial instruments better.

What are REITs?

REITs are innovative financial instruments but are very similar to mutual funds. They pool money from multiple investors and invest in income-generating real estate properties such as office spaces, malls, hotels, residential properties, and warehouses. These properties generate regular income in the form of rent, which is distributed to the investors through dividends.

REITs are listed on the stock exchange, and you can invest in them just like you invest in shares through your demat account. The minimum investment in a REIT is somewhere between Rs 10,000 – Rs 15,000 per lot. Alternatively, you can invest in REITs through real estate mutual funds or when they are first issued to the public through an Initial Public Offering (IPO).

REITs have a similar structure to that of mutual funds. There is a sponsor who promotes the REIT with their funds. Then, there is a fund management company that is responsible for selecting the properties for the portfolio of a REIT. There is also a trustee who oversees fund management, keeping investor’s interests in mind. REITs are mandated to invest 80% of the assets in real estate properties and the rest in other assets such as cash or stocks.

REITs are an excellent tool for diversifying your investment portfolio. Moreover, they help take advantage of the real estate boom and earn regular income with a low investment.

Types of REITs

The following are six types of REITs in the market.

Equity REITs: These REITs own income-generating properties and generate income through rent.

Mortgage REITs: REITs that lend money to real estate companies and earn income through mortgage payments are mortgaged REITs or mREITs. They also invest in mortgage-based properties and earn income in the form of interest.

Hybrid REITs: These are a combination of equity and mortgage REITs and earn income in the form of rent and interest.

Private REIT: They are privately placed REITs which have a limited number of investors, are not listed on the stock exchange and are not registered with SEBI.

Publicly Traded REIT: REITs that trade on the stock exchange and are registered with SEBI are publicly traded REITs.

Public but not Listed REIT: These are REITs that are registered with SEBI but not listed on the stock exchange. They are less liquid than a listed REIT but considerably more stable as they are less prone to market volatility.

What are InvITs?

InvITs are similar to REITs but invest in infrastructure projects like roadways, power plants, transmission lines, and other infrastructure projects. They also provide regular income in the form of dividends. However, they take quite some time to generate this cash flow.

Infrastructure development companies create InvITs to raise money to build various infrastructure projects. This money will also help them pay off their debts and generate enough cash to expand their business.

InvITs also have a similar structure to mutual funds consisting of trustee, sponsor, investment and project manager. The sponsor promotes the InvIT with an initial investment of Rs 100 crores. An investment manager is a company that supervises the assets and investments of the InvIT. The project manager, on the other hand, ensures that the infrastructure project is executed on time. A trustee oversees the management of the fund and must invest 80% in infrastructure assets.

The minimum investment in an InvIT is around Rs 10,000 to Rs 15,000; therefore, it is very accessible to retail investors. To invest in an InvIT, you need to have a demat account through which you can directly purchase the shares of an InvIT. Alternatively, you can invest through mutual funds, but they only allocate 5% to infrastructure assets.

An InvIT is required to invest 80% of its assets in infrastructure projects and pay 90% of the generated income as dividends. This ensures the InvIT is using the money for the right purpose and also ensures the profits are distributed regularly to investors.

Just like REITs, InvITs also offer the needed diversification to an investment portfolio, which will help in combating market volatility.

Types of InvITs

The following are different types of InvITs.

Finished infrastructure projects: InvITs that invest in finished infrastructure projects such as highways or power plants. They generate income immediately.

Under-construction infrastructure projects: They invest in under-construction infrastructure projects and take time to generate income.

Privately held: InvITs that are not listed on the stock exchange and hence cannot be bought by retail investors are privately held InvITs. They have a very limited investor base.

Public listed: InvITs that are listed on the stock exchange and can be easily traded by retail investors are publicly listed InvITs.

Type of infrastructure project: InvITs are also based on the type of project they own and operate. Broadly, there are five kinds of InvITs based on the type of project, namely, energy, transport and logistics, communication, social and commercial infrastructure, and water and sanitation.

Difference between REIT and InvIT

Although REITs and InvITs serve an investor’s investment purpose in the real estate market, they are very different from each other. The following are some of the major differences between the two.

Investment objective: REITs aim to make real estate more accessible to retail investors by breaking down a big investment into small shares that are affordable to retail investors. In contrast, InvITs aim to make the infrastructure sector accessible to retail investors.

Investment avenue: REITs invest in office spaces, residential properties, warehouses, malls, and data centres. InvITs invest in infrastructure projects such as power plants, parks, roadways, irrigation projects, and fibre cables.  

Ownership: REITs either own the underlying property or give it on lease for a long-term basis. The InvIT doesn’t own the property. It is transferred back to the authority once the project is completed.

Regulations: REITs are governed by SEBI Real Estate Investment Trust Regulations, 2014, whereas InvITs are governed by SEBI Infrastructure Investment Trust Regulations, 2014.

Income: REITs generate income by renting out the properties or giving it on the mortgage for the long term. InvITs generate income from tariffs or fees collected. REITs generate a more stable income than InvITs.

Liquidity: REITs are more popular than InvITs and hence are more liquid. To add to this, REITs have a smaller lot size, which is feasible to invest for small investors.

Risks: InvITs invest in sectors such as energy, communication, and roadways, which are highly regulated by the government. Hence, they are exposed to political and regulatory risks. On the other hand, REITs invest in commercial and residential properties which are less prone to regulatory risks but have market risk as they trade on the stock exchange.  

Growth prospects: REITs have a high potential to grow as the properties they invest in can be rebuilt or remodelled. Moreover, they can acquire new properties and also increase the rent to increase their income. On the other hand, InvITs can only grow when the revenue increases and if they can acquire more projects at lower bids.

Which is better among REITs and InvITs?

Both REITs and InvITs provide a backdoor entry into the real estate market. They make real estate investment affordable and ensure that you earn regular income in the form of dividends. However, each of them has its own advantages and disadvantages.

REITs are highly liquid and offer stable income, but due to their popularity, they are traded more on the stock exchange and are prone to market volatility. InvITs, on the other hand, are less liquid, offer less stable income than REITs and are prone to regulatory and political risk. However, they allow you to participate in major infrastructure projects of the company.

Hence, before choosing any investment, it is important to analyse its pros, cons and ratings, which are released by independent rating agencies. Next, ascertain your goals and risk tolerance levels and try to choose the investment that best suits your goals and needs and has the highest rating.

Happy investing!

Frequently Asked Questions

How many REITs and InvITs are there in India?

There are four listed REITs and 21 listed and unlisted InvITs in India.

Is a REIT a good investment?

REIT allows you to invest in the real estate market with a very low investment and generate regular income through rent. Hence, it is considered a good investment for investors who want to diversify their investment portfolio and take advantage of the real estate boom in India.

Who can invest in REITs and InvITs?

Any investor who can afford to invest Rs 10,000 to Rs 15,000 can invest in REITs and InvITs in India.

Can I buy 1 unit of REIT in India?

Yes, you can buy a minimum of 1 unit of a REIT. SEBI has reduced the minimum investment from 200 units to 1 unit to make REITs more affordable.

Are InvITs risky?

InvITs are exposed to regulatory and political risk. But apart from this, they are less risky than pure equity investments as they invest 80% of the assets in infrastructure projects.

Can I sell REIT anytime?

REITs are very liquid and can be sold anytime in the market as they trade on the stock exchange.