REIT Vs InVIT

The primary difference between REIT and InvIT lies in their underlying assets and investment focus. While REITs (Real Estate Investment Trusts) primarily invest in income-generating real estate properties, InvITs (Infrastructure Investment Trusts) focus on infrastructure projects such as highways and renewable energy assets.

What are REITs?

A REIT (Real Estate Investment Trust) is a company that owns, operates, and finances income-producing real estate properties. REITs pool money from multiple investors to invest in commercial real estate like office buildings, shopping malls, residential apartments, and data centers.

REITs in India must distribute 90% of their rental income to investors as dividends, making them attractive for steady income seekers. These trusts are regulated by SEBI and must maintain specific asset requirements. To qualify as a REIT, the trust needs to invest at least 80% of its assets in completed, income-generating properties. The remaining 20% can go into under-construction properties, government securities, or money market instruments. 

REITs trade on stock exchanges like regular shares, allowing investors to buy and sell units easily. The minimum investment requirement for REITs in India is ₹10,000-15,000, making real estate investments accessible to retail investors who otherwise couldn’t invest in premium commercial properties. This investment vehicle also offers benefits like professional management, diversification across properties, and potential capital appreciation along with regular rental income.

Example of REITs

Consider a REIT called Value Properties Trust that owns five premium office buildings across major Indian cities. The REIT purchased these properties for ₹1,000 crores and earns ₹100 crores annually through rental income from corporate tenants. Following SEBI guidelines, the REIT distributes 90% of this rental income as dividends to its investors. 

Let’s understand this better from an individual investor’s perspective. Suppose you invest ₹50,000 in this REIT by buying its units from the stock exchange. Since the REIT distributes ₹90 crores among all unitholders, you receive ₹4,500 as your annual dividend share, paid in four quarterly installments of ₹1,125 each. The REIT keeps ₹500 from your portion for property upkeep. Your investment gives you part ownership in premium commercial buildings that you couldn’t afford individually. 

The REIT’s professional management team handles all property-related tasks – from finding tenants and collecting rent to maintaining the buildings. This way, you earn regular rental income without dealing with the hassles of direct property ownership. If property values increase over time, your REIT units may also appreciate, giving you additional returns through capital gains.

InVIT Meaning

An Infrastructure Investment Trust (InvIT) is a collective investment scheme that pools money from investors to own and manage income-generating infrastructure assets. InvITs work like mutual funds for infrastructure projects, allowing investors to earn regular income from assets like toll roads, power transmission lines, gas pipelines, and telecom towers.

InvITs in India operate under strict SEBI regulations to protect investor interests. These trusts must distribute at least 90% of their cash flows to investors as dividends. The underlying infrastructure assets generate a steady income through long-term contracts, which provides stability to investor returns. For instance, a toll road InvIT earns money from toll collections, while a power transmission InvIT receives fixed fees from power distribution companies. InvITs can either be publicly listed on stock exchanges or remain private.

Example of InVITs

Consider an InvIT called Power Grid Network Trust that owns a network of power transmission lines across India. The InvIT acquired these assets for ₹2,000 crores and generates ₹200 crores annually through fixed transmission fees from power distribution companies. 

Let’s understand how this benefits individual investors through a simple example. Imagine you invest ₹70,000 in this InvIT through the stock exchange. From the total distribution of ₹180 crores, you receive ₹6,300 as your annual dividend share, paid quarterly at ₹1,575. The InvIT keeps ₹700 from your portion for maintaining the transmission lines. Your investment gives you partial ownership in critical infrastructure that typically requires massive capital. 

The InvIT’s experienced team handles all operations – from maintaining transmission lines to collecting fees from power companies. This structure lets you earn stable income from essential infrastructure without operational responsibilities. Unlike traditional infrastructure investments, InvIT units can be easily bought or sold on the stock exchange, providing better liquidity. The predictable cash flows from power transmission fees make this investment particularly stable, as electricity demand remains constant regardless of economic conditions.

Differences Between REITs and InVITs

The fundamental difference between REITs and InvITs lies in the type of assets they manage and their income sources. REITs focus on real estate properties like office buildings and shopping malls, earning through rental payments. InvITs, on the other hand, invest in infrastructure projects like highways and power lines, generating income through user fees or fixed contracts.

Here’s a detailed comparison of REITs and InvITs across key parameters:

Advantages of REITs

The main advantage of REITs is that they make commercial real estate investments accessible to regular investors. Through REITs, investors can own portions of premium properties worth hundreds of crores with investments as small as ₹10,000-15,000 while earning regular rental income through quarterly dividend payments.

• Regular Income Stream: Professional management teams ensure timely rent collection from tenants, providing investors with quarterly dividends. Since REITs must distribute 90% of their rental income, investors receive consistent payouts. For instance, a ₹1 lakh investment in a REIT generating an 8% annual yield provides ₹8,000 in yearly dividend income.
• Portfolio Diversification Benefits: REITs hold multiple properties across different cities and property types, reducing investment risk. A single REIT might own office spaces in Mumbai, retail spaces in Delhi, and warehouses in Bangalore. This diversity protects investors from location-specific risks and market fluctuations in any single property type.
• Professional Management Expertise: Expert management teams handle all aspects of property management, from tenant selection and rent collection to building maintenance and upgrades. This professional oversight ensures properties maintain their value and attract quality tenants. Investors benefit from this expertise without dealing with day-to-day property management challenges.
• High Liquidity: REIT units trade on stock exchanges, allowing investors to buy or sell their investments quickly. Unlike traditional real estate, which takes months to sell, REIT units can be converted to cash within days. This liquidity gives investors flexibility to adjust their investment portfolio based on their needs.
• Transparency and Regulatory Protection: SEBI’s strict oversight ensures REITs maintain transparent operations and follow proper governance standards. Regular audits, quarterly performance reports, and mandatory disclosures protect investor interests. Additionally, the requirement to invest primarily in completed, income-generating properties reduces any kind of investment risk.

Disadvantages of REITs

The main disadvantage of REITs is their sensitivity to real estate market conditions and interest rate changes. When property markets decline, or interest rates rise, REIT values can drop significantly, affecting both unit prices and rental income. This market sensitivity makes REITs more volatile than traditional fixed-income investments.

• Limited Control: Investors have no say in property selection, management decisions, or tenant choices. The REIT management team makes all crucial decisions about buying, selling, or renovating properties. While professional management is beneficial, investors must accept all decisions, even if they disagree with the property selection or management strategy.
• Complex Tax Implications: REIT investments involve multiple tax considerations that can complicate tax planning. Rental income is taxed at normal income tax rates, while capital gains apply when selling units. Additionally, some REITs may have tax implications at both the trust and individual levels, requiring careful tax planning.
• High Management and Operating Fees: REITs charge various fees for property management, administrative costs, and other operational expenses. These fees reduce the overall returns available to investors. A typical REIT might charge 1-2% of asset value annually, which directly impacts dividend payouts and long-term returns.
• Risk in Specific Sectors: Many REITs focus on specific property types like office spaces or retail malls. This concentration can increase risk when that particular sector faces challenges. For example, office REITs might struggle during work-from-home trends, while retail REITs suffer during economic downturns.
• Potential for Overvaluation: Popular REITs sometimes trade at prices higher than their underlying property values. This premium valuation increases the risk of price corrections when market sentiment changes. Investors buying overvalued REIT units might face significant losses if valuations return to normal levels.

Advantages of InVIT

The major advantage of InVIT is that it provides investors with a distinctive opportunity to gain exposure to infrastructure assets that generate income, offering the potential for stable and predictable cash flows, capital appreciation, and diversification of their investment portfolio.

• Liquidity: InVITs are listed on stock exchanges, which means that investors can easily buy or sell their units. This is in contrast to direct investments in infrastructure projects, which can be illiquid and difficult to exit. The liquidity offered by InVITs allows investors to manage their portfolios more effectively.
• Transparency: InVITs are required to disclose important information about their operations, financials, and underlying assets to investors on a regular basis. This transparency helps investors make informed decisions and assess the risks and returns associated with their investments. The regular disclosures also help to build trust between InVIT and its investors.
• Professional Management: InVITs are managed by experienced professionals who have expertise in managing infrastructure assets. These managers are responsible for making investment decisions, overseeing the operations of the underlying assets, and ensuring that the InVIT generates stable and predictable cash flows for investors.
• Tax Benefits: InVITs offer tax benefits to investors, as the income distributed by InVITs is exempt from tax in the hands of the investors. This can help improve investors’ overall returns and make InVITs an attractive investment option. Additionally, InVITs are also exempt from dividend distribution tax.

Disadvantages of InVIT

The key disadvantages of InVITs are the inherent risks and limitations associated with these investment vehicles. While InVITs offer an attractive opportunity to gain exposure to income-generating infrastructure assets, investors must carefully consider concentration risk, liquidity constraints, regulatory and political uncertainties, and interest rate sensitivity, which can significantly impact returns.

• Concentration Risk: InVITs invest in a limited number of infrastructure assets, which can lead to concentration risk. If any of these assets underperform or face issues, it can significantly impact the overall returns of the InVIT. Diversification is limited compared to other investment options like mutual funds, exposing investors to higher risk.
• Liquidity Constraints: InVITs are relatively less liquid compared to traditional stocks or mutual funds. The trading volume of InVIT units on stock exchanges may be lower, making it difficult for investors to buy or sell large quantities quickly without affecting the price. This lack of liquidity can be a concern for investors.
• Regulatory and Political Risks: Infrastructure projects are often subject to regulatory oversight and political influences. Changes in government policies or regulations can impact the profitability of the underlying assets held by InVITs. For example, if a new government decides to review or renegotiate existing contracts, it could affect the returns of the InVIT.
• Interest Rate Sensitivity: InVITs often involve long-term infrastructure projects that are financed through debt. Changes in interest rates can affect the borrowing costs and profitability of these projects. If interest rates rise, it can put pressure on the InVIT’s ability to service debt and distribute cash flows to unitholders.

REIT Vs InVIT – Quick Summary

• REITs pool investor money to buy and manage income-producing real estate properties. They let investors own parts of premium properties without direct management responsibilities.
• REITs invest in office spaces, malls, and warehouses to earn rental income from tenants occupying these commercial properties.
• InvITs gather funds to invest in infrastructure like roads, power lines, and renewable energy projects. They give investors access to large infrastructure investment opportunities.
• InvITs operate toll roads or power transmission networks, earning money through toll collections or fixed transmission fees from power companies.
• The main difference between REITs and InvITs is their investment focus. REITs invest in real estate while InvITs focus on infrastructure. This affects their income sources – REITs earn through rental payments while InvITs earn through usage fees or contracts.
• The primary advantage of REITs is that they provide regular dividend income through rental payments, as they must distribute 90% of their income to investors by law.
• The key disadvantage of REITs is that they are vulnerable to property market risks, affecting both property values and rental income, leading to fluctuations in unit prices and dividends.
• The major advantage of InvITs is that they provide steady income from essential infrastructure assets through stable cash flows from long-term contracts or user fees.
• The primary disadvantage of InvITs is their high concentration risk since they invest in limited infrastructure projects – problems in one major asset can significantly impact returns.
• Start your investment journey in REITs and InvITs with Alice Blue’s seamless platform. 

What is the Difference Between REIT and InVIT? – FAQs