Slowly but surely, mutual funds warm up to investment in REITs, InvITs

Mutual fund (MF) investments in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have risen significantly post-pandemic, with several new schemes maintaining some allocation to these new asset classes.

Data collected by the PRIME mutual fund database shows that mutual fund exposure to REITs and REITs has increased several times in the wake of the COVID-19 pandemic.

The property value, which was Rs. 734 crores at the end of March 2020, has increased to Rs. 5,200 crores by the end of March 2023.

MF’s exposure to listed real estate investment trusts and listed REITs is set to rise to seven (from day six), and the Nexus Select Trust REIT initial public offering is scheduled to open this week for subscription.

The number of financing houses investing in REITs and real estate investment trusts rose to 18, compared to seven in 2020.

ICICI Prudential MF and HDFC MF had the highest exposure at the end of March 2023, with investments of Rs.2,002 crore and Rs.1,459 crore, respectively.

Despite a sevenfold increase, MF’s exposure to the two asset classes is only 0.13 per cent of its total assets under management of Rs40 trillion. REITs and REITs are gaining momentum in India, similar to other developed countries.

According to analysts, the increase in microfinance investments coincides with the improvement of financial metrics for commercial real estate and the government’s orientation towards infrastructure.

In the case of REITs, the underlying asset is mostly commercial real estate. If you see the past few years, returns for properties like this have improved dramatically, says Nirav Karkera, head of research, Fisdom, with companies slowly returning to a work-from-office mode and foot traffic in malls increasing.

MFI regulations allow plans (including equity, debt, and hybrid funds) to invest up to 10 percent of their investment portfolios in REITs and REITs.

Recently, NSE Indices launched India’s first REITs & InvITs Index, expanding the scope of MFs to come out with passive REITs and InvITs. However, the index now faces concentration risk because there are only six REITs and REITs listed.

REITs are structured like ETFs and require the company to own a plot of land and establish a credit structure. It can operate and lease multiple properties. REITs have emerged as a convenient way to hold real estate in portfolios, without the physical ownership of real estate.