A low interest rates regime, the positive outlook on rental yields post the COVID disruption and an efficient listing framework drew MFs to REITs and InvITs

Over the past few years, mutual funds (MF) have warmed up to investing in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs). Data from ACE MF shows that equity, debt and even multi-asset funds have been investing a small portion of their portfolio typically up to 10 percent in these new asset classes.
With the recent public issue of Brookfield India REITs, currently there are five REITs and InvITs available in the exchanges.
But have their worked for mutual funds? Lets take a look.
Taking baby steps
Currently, 20 schemes from 10 fund houses have invested in REITs and InvITs, as per their January 2021 portfolios. ICICI Prudential MF topped the list by holding Rs 1,142 crore worth of such assets, followed by Aditya Birla Sun Life MF that held investments worth Rs 186 crore in these instruments.
The Securities and Exchange Board of India (SEBI) has allowed the launching of dedicated schemes that predominantly hold Indian REITs and InvITs. It has also allowed all other schemes (including equity, debt and hybrid funds) to invest up to 10 percent of their NAVs in REITs and InvITs.
Kotak Mahindra Asset Management Company (AMC) recently came out with a fund of funds NFO which will invest its entire corpus in an international scheme that will invest in REITs across the Asia Pacific region (excluding Japan).
Data compiled from ACEMF shows that MFs allocation to REITs and InvITs grew 45 percent over the last one year to Rs 1,495 crore (as of Dec 2020).
An alternative asset class
A REIT structured just like a mutual fund entails a firm owning a land parcel and setting up a trust structure. Called REIT, it can own, operate and lease multiple properties. REITs are a convenient way of holding real estate in your portfolio, without physically owning a property.
InvITs are similar to REITs, but they hold a portfolio of infrastructure assets (or projects).
Income earned from such projects highway toll collections or rental income from properties are passed on to investors.
Both REITs and InviTs are listed and traded in the exchanges. Individual investors and mutual funds can trade in them.
Experts believe that factors that attracted MFs towards REITs and InVITs lately are a low interest rates regime, positive outlook on rental yields post the COVID disruption and an efficient listing framework.
Ravi Saraogi, Co-founder – Samasthiti Advisors says, Earlier, MFs used to go down the rating curve to bolster yields, but with the credit funds fiasco, there is an increased preference for looking at alternative debt-like exposures such as REITs and InvITs that have seen yields pick-up and where structured rating is high.
Infrastructure projects are expected to get rolling soon post COVID-19. And, as people start getting back to their offices, post-vaccination, REITs are expected to benefit as well.
Shobhit Mathur, Senior Director, Kotak Investment Advisors says, Institutional investors get drawn to REITs and InvITs because there is clarity on who the sponsor is, and high yields, despite a low interest rate environment. Some InvITs have offered 9 percent yield at current prices, with certainty of cash flows.
Ravishu Shah, Managing Director and partner, RBSA Advisors adds that the mandate to distribute a minimum of 90 per cent of their cash flows to unit holders also meets the requirements of debt-based hybrid funds.
How have the returns from REITs and InvITs been?
Both REITs and InvITs do not have a long-term track record in India, so its too soon to tell. So far, it has been a mixed bag. Two REITs Embassy Office Parks REIT, Mindspace REIT demonstrated a tepid performance so far, while India Grid Trust managed to outperform peers and the relative indices including the S&P BSE India Infrastructure Index and S&P BSE Realty Index since being listed on the exchanges.
Value as on Feb 3, 2021. BSE prices and are adjusted for dividends.
Mutual funds allocated more to Embassy Office Parks REIT (Rs 678 crore), India Infrastructure Trust (Rs 512 crore) and IRB InvIT Fund (Rs 219 crore).
What does the future hold for REITs and InvITs?
REITs and InvITs are new asset classes and fund houses are only now slowly warming up to them. The recent Brookfield India REIT IPO too saw strong demand and was subscribed 7.9 times, showing investors’ confidence in India’s commercial real estate segment.
Shah of RBSA Advisors believes that the current Budget proposal allowing debt financing by foreign portfolio investors (FPIs) in REITs and InvITs, will now allow the trusts to raise debt capital at competitive rates. But retail investors should take the mutual funds route, rather than buying shares of such REITs or InvITs directly from stock exchanges, experts such as Saraogi of Samasthiti say.
Already most of the mutual fund schemes have a provision in their offer documents that allow them to invest in REITs and InvITs.