REIT vs InVIT : Key Differences & Investment Guide

REITs vs InVITs: Key Differences

While both REITs and InVITs offer investment opportunities in income-generating assets, they differ in several aspects. Here is a detailed comparison:
 

Growth Potential of REITs & InVITs

REITs: The growth of a Real Estate Investment Trust is primarily driven by asset redevelopment, new constructions, and property acquisitions. By upgrading existing properties, building new structures, or acquiring high-value commercial real estate, REITs can increase rental income and overall asset value.

InVITs: Infrastructure Investment Trusts expand by acquiring new infrastructure projects through a bidding process. The successful acquisition of operational assets such as toll roads, power transmission networks, and pipelines can lead to higher revenue generation over time. The efficiency of managing these assets also plays a crucial role in their long-term growth.
 

Structural Composition and Investment Allocation

Structurally, both REITs and InVITs operate as investment trusts that pool funds from investors and follow a regulated framework involving a sponsor, trustee, and investment manager. However, their asset allocation differs significantly:

REITs: Invest in both completed and under-construction commercial real estate properties.

• A minimum of 80% of assets must be invested in income-generating properties that are already completed.
• The remaining 20% can be allocated to under-construction properties, debt securities of real estate companies, shares of listed firms (with at least 75% of their income derived from real estate activities), government securities, or money market instruments.

InVITs: Focus on infrastructure projects such as roads, highways, power plants, and warehouses.

• At least 80% of assets must be invested in completed and revenue-generating infrastructure projects.
• Up to 20% can be allocated to other eligible investments, including under-construction projects, debt instruments of infrastructure companies, or listed equity shares (with at least 80% of revenue derived from infrastructure operations).

Additional Restriction for InVITs: Investments in under-construction projects, debt securities of infrastructure firms, and equity shares outside the infrastructure sector cannot exceed 10% of the total trust value.
 

Revenue Generation and Stability

The core difference between InVITs and REITs lies in how they generate revenue and maintain financial stability:

REITs: Generate income through leasing, renting, or selling commercial properties.

• REITs currently cannot invest in residential real estate, only commercial properties are permitted.
• REITs must distribute 90% of their income as dividends to investors.
• If a REIT sells a property, it has the choice to reinvest the proceeds or distribute 90% to unitholders.
• REITs tend to be more stable since rental agreements provide predictable, recurring income.

InVITs: Generate income from operational infrastructure assets such as toll roads, power grids, and gas pipelines. These trusts sign long-term contracts with government entities or corporations to ensure steady revenue streams.

• Like REITs, InVITs are also required to distribute 90% of their net distributable cash flow to investors.
• If an InVIT sells an asset, it can either reinvest in another infrastructure project or distribute 90% of the proceeds to investors.
• InVITs depend on external factors such as infrastructure utilization rates and government regulations, which may impact revenue stability.
   

Risk Factors and Market Uncertainty

While both REITs and InVITs offer diversification benefits, they carry different risk profiles:

Risks Associated with REITs:

• Publicly traded REITs: Face interest rate risks, when interest rates rise, investors may shift to safer investment options, causing REIT stock prices to decline.
• Non-traded REITs: Lack price transparency, making it difficult for investors to assess their value. Additionally, they often have lock-in periods and high upfront fees, which may lower overall returns.

Risks Associated with InVITs:

• Revenue Uncertainty: Investors rely on valuation reports that project expected returns based on infrastructure utilization. However, if actual usage falls short of estimates (e.g., lower toll collections on highways), returns may be significantly impacted.
• Regulatory and Political Risks: Many infrastructure projects operate under government concessions, and policy changes can affect profitability. For example, if the government introduces toll-free roads near an InVIT-operated highway, the revenue from toll collections may decline.
• Project-Specific Risks: Since infrastructure projects have long gestation periods, factors such as cost overruns, delays, and changes in economic conditions can impact their viability.
   

Minimum Investment Requirements

According to SEBI’s Circular dated April 23, 2019 [SEBI/HO/DDHS/DDHS/CIR/P/2019/59], the minimum investment thresholds for REITs and InVITs are:

• REIT – Each allotment lot must be valued at a minimum of ₹50,000, with each lot consisting of 100 units.
• InVIT – Each allotment lot must be valued at a minimum of ₹1 lakh, with each lot consisting of 100 units.

These regulations ensure accessibility for retail investors while maintaining stability in these investment vehicles.
 

Which One Should You Choose – REIT or InVIT?

Choosing between REITs and InVITs depends on your investment goals, risk tolerance, and return expectations.

• You can choose REITs if:

You seek stable, rental-based income with lower risk.
You want exposure to commercial real estate.
You prefer high liquidity and easier exit options.

• You can choose InVITs if:

You are comfortable with higher risk in exchange for potentially higher returns.
You want to invest in infrastructure projects with long-term cash flow potential.
You can commit a higher minimum investment (Rs.1 lakh).
 

Conclusion

Both InVITs and REITs provide unique investment opportunities in income-generating assets. While REITs offer stability with rental income from commercial properties, InVITs present a chance to invest in infrastructure with the potential for higher returns. Understanding the differences and aligning them with your financial goals will help you make the right investment decision. Whether you choose REITs or InVITs, these instruments offer an efficient way to diversify your portfolio and generate passive income.

Disclaimer: This blog is intended solely for educational purposes. The securities and investments mentioned are not to be construed as recommendations.