REITs: More REITs entering fund house portfolios

MUMBAI: Regular income, long-term cash flow visibility and better risk-adjusted returns are driving fund managers to invest in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). These products are considered by fund managers as a separate asset class and offer returns between stocks and bonds.

Mutual funds have been steadily purchasing these products over the past few years, mainly through hybrid schemes, and have now doubled that amount as of February 2024, according to data from Accord Fintech and ET Intelligence Group. It owns assets worth more than 11,446 million rupees. Holds 418.6 billion as of February 2023.

“Investing in REITs/InvITs provides exposure to primarily operating commercial real estate and infrastructure assets with relatively stable cash flow generation, and as demand for these assets continues to grow. It also offers growth potential by acquiring new assets in the portfolio at increasing yields as expected in our country,” said Akhil Kakkar, Senior Fund Manager, Fixed Income, ICICI Prudential Mutual Fund. he said.

Fund managers believe that the overall risk and return expectations here are higher than debt, but lower than equity, with cash flow visibility. The market prices of the four listed REITs have increased by an average of 15% over the past year, primarily as the economy recovers from the coronavirus, employees return to offices, and work-from-home (WFH) approaches. It is. There are signs that this is coming to an end and that things will return to normal in the coming years.

“The high returns over the past year have been insane. These products can earn yields between 8% and 10% over the long term, which is higher than debt over the long term, lower than equity, and hybrid It is suitable for the scheme,” said Nirav Karkera, head of research at Fisdom.

“A REIT is a platform that primarily owns and operates income-generating commercial real estate. It generates regular rental income by leasing operating assets and adds new assets at an attractive IRR (internal rate of return). and increase the value of the capital by selling the asset at a premium, re-leasing etc.,” said Sushil Budhia, senior fund manager, fixed income investments, Japan India Mutual Fund. Budhia said that by law, 90% of a REIT’s profits must be distributed as dividends to unitholders, and there is a cap on undeveloped portfolios. Large fund companies are adding these products to hybrid schemes where many investors expect stable income with low volatility. These products are housed in categories such as equity savings schemes, balanced advantage, dynamic asset allocation funds, aggressive equity funds and hybrid funds. Many such hybrid schemes aim to generate income through a combination of regular income and potential capital appreciation.

“Due to both cash flow predictability and growth potential, REITs as an asset class offer superior risk-adjusted returns,” Budhia said.

Kakkar said these products offer relatively stable distribution income with growth potential. These income-producing assets distribute dividends quarterly, ensuring a steady cash flow for investors. Regulations require these products to distribute 90% of their annual cash flow, thus providing long-term cash visibility and guaranteeing investors a minimum minimum amount of cash return.