Stock Fundamentals

Place your trust in InvITs, REITs

Keerthi Sanagasetti | Updated on October 20, 2019 Published on October 20, 2019

The performance of investment trusts so far has been noteworthy

Investments in high- yielding immovable properties — office spaces and infrastructural assets — have almost been off-limits for retail investors, considering the large capital outlay involved.

For retail investors, the unregulated nature of property market, lack of technical know-how and illiquidity only add to the perceptible risks associated with such investments.

To make investments in such assets affordable to larger public, avenues such as the Real Estate Investment Trust (REIT) and the Infrastructure Investment Trust (InvIT) were introduced in 2014. Subscribing to units of such investment trusts help retail investors participate in the long- term prospects of these sectors. Liquidity, professional management and transparency come as added advantages.

Currently, there are two InvITs– IRB Infrastructure and India Grid Trust – and one REIT – Embassy Office Parks– available for retail investors (publicly traded). Other InvITs of GMR, MEP, IL&FS Transportation and Reliance are privately placed and hence they are not meant for retail participants .

Stricter SEBI norms governing REITs and InvITs since 2014 have made investments in such trusts less risky for retail participants--- ensuring steady cashflows and distributions to unitholders.

If you have a moderate to high risk appetite, you can consider investing a part of your surplus in such alternative investment options. Here’s a lowdown on existing options. The investment trusts– REIT & InvIT– essentially operate as closed-ended mutual funds, wherein investors subscribe to units of a pool of funds.

These funds are then used to purchase real estate (in the case of an REIT) or infrastructural properties (in the case of InvIT).

For instance, Embassy Office Parks REIT invests in office spaces, while India Grid Trust predominantly has power transmission assets in its portfolio. Similarly, highways (yielding toll revenue) constitute IRB InvIT’s asset portfolio.

Subscribers to these investment trusts are assured of steady cashflows and distributions.

Ideally, investors in these trusts derive returns through regular income earned in the form of distributions and appreciation in the value of units purchased.

Regular payout

SEBI mandates that publicly offered investments trusts invest no less than 80 per cent of the pooled funds in fully constructed and income- generating assets. This mitigates the risk to some extent.

Additionally, SEBI also mandates that investment trusts distribute to its unitholders at least 90 per cent of net distributable cashflows. The distributions must be made in every financial year, with a frequency of at least once in every six months.

The regulations, thus, ensure regular payouts to unitholders. For instance, India Grid Trust cumulatively distributed ₹24.6 per unit, since listing. Similarly, IRB InvIT distributed ₹25.8 per unit .


Capital gains/loss

Since these investment trusts are listed, appreciation in the price of units held also adds to the returns. Embassy Office Parks REIT, which got listed in April this year, has rallied 43 per cent, thanks to its stellar performance. Riding on the expanding demand for rental office spaces, the REIT has been able to deliver good returns to investors. It has also distributed ₹5.4 per unit in the June quarter, taking the total returns to about 45 per cent since its listing.

The price of India Grid Trust, however has fallen since its listing in 2017--from ₹100 to ₹95 currently.



Widening the retail base

In April 2019, SEBI lowered the minimum allotment in publicly offered InvITs to ₹1 lakh from ₹10 lakh earlier. The investment threshold was brought down to ₹50,000 in the case of an REIT from ₹2 lakh earlier.

While the move could attract more retail participation, the same is applicable only to initial public offers of upcoming investment trusts. For the existing publicly traded investment trusts. this applies on any follow- on offers only.

To increase traction in existing investment trusts, the size of a trading lot was also mandated to be lowered.

Following this, the three existing trusts almost halved their trading lot sizes - Embassy REIT, for instance, revised their lot size to 200 units from 400 earlier.

Complex taxation

Income earned by way of distribution and capital gains arising on sale of units are taxed differently.

If the units of REIT or InvITs are held for 36 months or a shorter time , then short term capital gains at the rate of 15 per cent shall apply on sale of units. Else, long term capital gains beyond ₹1 lakh shall be taxable at a rate of 10 per cent. While the benefit of indexation does not apply, applicable cess and surcharge shall be payable.

The income earned by investment trusts on their underlying investments (properties, securities etc) must be distributed in the same form as earned (capital gains on sale of underlying assets, rent, interest and dividend) and hence taxed accordingly.

Distributions from capital gains on sale of shares or assets held by the trust, and dividends upto Rs 10 lakh are tax exempt for the unitholder. Interest and rental income are taxable in the hands of unitholders, at applicable slab rates. Any other form of distribution will attract tax at the maximum marginal rate, which is 42.74 per cent (including surcharge and cess).

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Published on October 20, 2019
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