REIT Investment India & Their Growing Role in Real Estate Market

In India, the real estate sector is the country’s second-largest employer and is projected to contribute around 13% to the GDP by 2025, as per few sources. As a result, with REIT investment India, identifying and leveraging alternative funding sources has become increasingly important for sustaining growth in this vital industry.

What is a REIT?

Much discussed, REIT is a thing to be explored. A Real Estate Investment Trust (REIT) is an entity that owns, manages or finances income-generating real estate properties.  REITs pool money from multiple investors, allowing them to earn returns in the form of dividends from these assets – without the need to purchase, operate or directly fund property themselves.

A REIT is formed by a sponsor who initially holds the real estate assets. Let’s understand how to invest in REITs? These assets are transferred from a special purpose vehicle (SPV) to the REIT in exchange for units of the trust, with the sponsor required to retain a specified portion of these units. The remaining units are then offered to investors through an Initial Public Offering (IPO). The funds raised from the public are offered as payment for the units transferred to the REIT.

The tenants of the properties held by the REIT pay rent to the SPVs responsible for managing those assets. After statutory charges and taxes are deducted, the remaining rental income is transferred to the REIT. This is then distributed to the net cash flows and to its unit holders in the form of dividends. This arrangement allows investors to participate in commercial real estate markets and create a consistent rental income stream.

The Evolution

REITs originated in the United States in 1960, providing smaller investors with the opportunity to participate in income-generating real estate. Since then, the model has grown significantly and has been adopted by numerous countries, with similar structures now present in nearly 40 global markets. Over the past thirty years, the number of listed REITs has expanded from 120 in just two countries in 1992 to 893 across more than 40 countries and regions by 2022. This expansion highlights the growing acceptance of REIT and a great investment opportunity option. 

India entered into REIT with the launch of its first REIT, Embassy Office Parks, in March 2019. Since then, three additional REITs have become operational: Mindspace Business Parks REIT, Brookfield India Real Estate Trust and Nexus Select Trust. 

Although the sector has shown strong growth in the past year, REIT India accounts for only 13.7% (₹29,272 crore) of the country’s listed real estate – significantly lower compared to mature markets like the U.S., where REITs form 98.9% of listed real estate and Australia at 94.8%. This indicates substantial untapped potential for REIT investment India.

Understanding Micro, Small & Medium REITs

SEBI has introduced a new category called Small and Medium REITs (SM REITs). These REITs require a minimum asset value of US$6 million, significantly lower than the earlier minimum of US$59.9 million, applicable to traditional REITs. This change is aimed at making real estate investment more accessible and broadening participation among a wider pool of investors.

Under the updated framework, SM REITs can create separate schemes to hold real estate assets through SPVs. This structural flexibility is expected to simplify management, improve transparency, and make such investments more secure and appealing. Overall, the regulatory shift is designed to strengthen the market, build investor trust, and address operational and structural challenges linked to SPV-based ownership.

The introduction of SM REITs is expected to significantly influence the prop-tech investment landscape. This policy shift aims to broaden investor participation in real estate as an investment class, improve market liquidity, and create new opportunities for expansion in the sector.

People are thinking of how to invest in REITs but the reality is that the structure has become simple. By reducing the minimum asset size for REITs, SEBI has effectively opened the door for smaller projects and investors to benefit from the REIT framework. This approach not only responds to evolving market needs but also aligns with the global movement toward greater inclusiveness and diversification in real estate investment.

Conclusion 

REITs have emerged as a vital investment vehicle that democratizes access to income-generating real estate. By allowing individuals to invest without having to buy or manage property directly, REITs provide a transparent and regulated platform for earning steady returns. The global growth of REITs and India’s recent but promising participation in this space, highlights their potential to channel long-term capital into the real estate sector. As regulatory frameworks evolve and market awareness increases, REITs are poised to play a significant role in enhancing liquidity, improving financial inclusion and strengthening the real estate ecosystem in India.

Frequently Asked Questions (FAQ’s)

1. What is a REIT?

A Real Estate Investment Trust (REIT) is a company that owns, operates or finances income-producing real estate. It allows investors to earn returns from real estate without owning property directly.

2. What are the benefits of investing in REITs?

REIT India offers steady rental income, portfolio diversification, high transparency due to regulatory oversight, and greater liquidity compared to directly owning real estate.

3. Is the REIT market in India expected to grow?

Yes. Still emerging, the REIT investment India market has significant potential, especially with the introduction of SM REITs, increasing investor participation and liquidity.