MUMBAI: Regular income, long-term cash flow visibility and better risk-adjusted returns have led to fund managers investing in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). These products, considered by fund managers as a separate asset class, deliver returns between equity and fixed income.
As per data from Accord Fintech and the ET Intelligence Group, mutual funds have been steady buyers of these products over the last couple of years, largely through their hybrid schemes and now own assets worth ₹11,446 crore as of February 2024 more than double the ₹4,186 crore owned in February 2023.
“Investment in REITs/InvITs offer exposure to largely operating commercial real estate and infrastructure assets with relatively stable cash flow generation. They also offer growth potential through acquisition of new assets in their portfolio at accretive yields as demand for these assets is expected to grow in our country,” said Akhil Kakkar, senior fund manager-fixed income at ICICI Prudential Mutual Fund.
Fund managers believe the overall risk and return expectation here is higher than debt but lower than equity, and there is visibility of cash flows. While market prices of the four listed REITs have moved up by an average of 15% in the last one year, it is largely on account of the economy bouncing back from Covid, employees coming back to offices, working from home (WFH) nearing an end and signs it will normalise over the next few years.
“The high returns in the last one year are an aberration. These products can yield anywhere between 8% and 10% over long periods, which is higher than debt and lower than equity over a longer period and are a good fit in hybrid schemes,” said Nirav Karkera, head of research at Fisdom.
“REIT is a platform which largely owns and operates income-generating commercial real estate. It generates regular rental income by leasing the operating assets and capital appreciation by adding new assets at attractive IRRs (internal rate of return), sale of assets at a premium, re-leasing etc,” said Sushil Budhia, senior fund manager-fixed income investments at Nippon India Mutual Fund.
Budhia said that by law, 90% of a REIT’s profits must be distributed as dividends to unitholders and a cap on the underdeveloped portfolio gives high visibility of future cash flows akin to debt characteristics.
Large fund houses have been adding these products to their hybrid schemes, where many investors expect stable income with low volatility. These products have found their way into categories like equity savings schemes, balanced advantage, dynamic asset allocation funds, aggressive equity and hybrid funds. Many such hybrid schemes aim to generate return through a combination of regular income and potential capital appreciation.
“With both predictability of cash flow and the growth potential, REITs as an asset class offer superior risk-adjusted returns,” said Budhia.
Kakkar said these products offer relatively stable distribution income along with growth potential. Every quarter, these income-generating assets distribute dividends ensuring steady cash flows to investors. Since by regulations, these products must distribute 90% of the yearly cash flows, it provides long-term cash visibility and assures investors of a minimum floor of cash returns.
