India’s real estate and infrastructure trusts: The way forward

Infrastructure and real estate continue to be two very critical sectors for the Indian economy.

A well-developed infrastructural set-up propels the overall development of a country. It also facilitates a steady inflow of private and foreign investments, and thereby, augments the capital base available for the growth of key sectors in an economy as well as its sustained growth. The infrastructure sector, which includes segments such as energy, transport, water and sanitation, communication, and social and commercial infrastructure, is the focus area for key policymakers to formulate and implement robust regulations, and for banks, corporates and various sovereign wealth and pension funds to undertake long-term investments. This is expected to ensure the time-bound creation of world-class infrastructure in the country. The Union Budget 2022 has once again brought the infrastructure sector into the spotlight because of higher capex budget allocation and also due to data centres and energy storage systems being granted the infrastructure status.

A robust real estate sector, comprising of subsegments such as housing, retail, hospitality and commercial projects, is fundamental to the growth of an economy. The Indian real estate sector has welcomed various alternative asset classes such as senior housing, data centres, life science space and affordable housing projects which are likely to propel it in future. Currently, India’s real estate sector is the second-largest employer in the country after agriculture and is slated to grow at a steady pace over the next decade. It has witnessed a paradigm shift from traditional finance to an era of structured finance, private equity and public offering, with a few players even exploring fractional ownership models aided by blockchain.

It would not come as a surprise that both these sectors need a substantial amount of continuous long-term capital for further growth. In view of the importance of these two sectors in the country and the paucity of public funds available to stimulate their growth, it is imperative that additional channels of financing are put in place.

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are investment vehicles that have become instrumental in attracting investment from retail and institutional investors in the infrastructure and real estate sectors, and supplement the financing efforts by formal banking institutions. Regulations governing REITs and InvITs are quite robust, and the regulator has been proactive in making necessary amendments to align them with stakeholders’ expectations and attract investors, without impacting the strong investor protection intent inherent in the regulations. Today, there are overall 19 InvITs along with three REITs in the market. The last REIT grabbed the attention of many and was subscribed 7.94 times at a 2.43% premium to its offer price.1 The introduction of REIT and InvIT regulations in the International Financial Services Centre – GIFT augurs well for these vehicles. These regulations also provide for an expansion in the scope of investment not just within the Indian jurisdiction but also in foreign jurisdictions, akin to the S-REITs.

Given this backdrop, it is useful to deviate from traditional thinking and explore the following:

• Going beyond the private sector sponsors: The National Highway Authority of India has already announced the launch of an InvIT, paving the way for other Government-owned assets looking at divestment.
• Captive real estate and infrastructure assets industry sponsors: Corporates with operating self-use infrastructure and commercial assets are looking for an alternative financing and value unlocking model.
• Non-traditional asset classes: Given the growth potential and Government focus, corporates are exploring asset classes such as data centres, warehouses and assets in the renewable space.

This report aims to provide an overview of the Indian REIT and InvIT market, and how various stakeholders can benefit by investing in these trusts. It also elaborates on regulations governing the structure of these instruments in India and compares REIT markets across major countries in the world. We hope that this report is a useful reference point for our readers on India’s REIT and InvIT regulations. As always, we welcome your comments and feedback on the report.