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REIT & InvIT: Making sense of it

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” - Andrew Carnegie, billionaire industrialist

The real estate sector has been so important for the country that millions of rupees are earmarked by the government for real estate development. But recently the banks and NBFC's, which are grappling with asset liability mismatch, are unable to provide the funds for real estate and infrastructure projects. While the developers need the funds to pump it into the projects, this is where REIT and InvIT becomes important.

In simple terms, these instruments are just like mutual funds which pool in money from investors and invest in real estate/infrastructure projects (in case of REIT/InvIT). These instruments provide the investors with predictable cash flows over the long period of time. The structure of REIT/InvIT contains the following entities:
  1. Trustee: Ensures compliance with rules & regulations
  2. Sponsor: Initiator of REIT who holds minimum of 15% of units
  3. Investment Manager: Manages investment decisions
  4. Project Manager: Manages day to day project execution decision
  5. Unitholders: Individual investors
From the developer perspective, these instruments provide instant liquidity to monetize the asset. This would also enable the availability of last mile funding for the projects. It would also help the companies to deleverage its balance sheets and become asset light. The companies can then focus on core competency of operations by segregating operations and infrastructure.
 
The investors get to be the part of rental income and the capital gains. The cash flows from the rentals tend to be stable and hence they offer stable income to the investors.

In case of InvIT, the companies have the opportunity to de-merge their asset business and monetize them. This would lead to heavy de-leverage of their balance sheets apart from monetizing these assets (Take the case of Jio monetizing their fibre asset).

However, the ultimate success hinges on the asset quality and the strong governance exhibited by these structures. The industry is highly cyclical and there are too many hidden mechanisms which may not be visible to the retail investors.
 
The  recent RBI mandate where they advised they revised the leverage limit from 49% to 70% along with the reduction in minimum lot size underscores the fact that the government is keen to encourage the financing using REIT/InvIT. 
 
This definitely heralds a new era in the industry and the reception of these instruments would lead to the much needed cash and hence turnaround of this industry.

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