Indian equities have had a challenging time decisively beating inflation, let alone deliver double-digit returns, over the last three years. Benchmark Nifty 50 TRI’s (total return index) compounded returns over the last three years stands at 6.7 per cent versus the consumer price inflation (CPI) index’s 4.1 per cent. The humble SBI FD would have delivered 6.5 per cent.
The story doesn’t change even when the investment horizon is extended to the last five years. Nifty TRI’s compounded gains stand at 5.4 per cent, while the CPI index has grown at a 4.95-per cent CAGR. The SBI FD would have offered 5.4 per cent.
Of course, these are par for the course when investing in equities. However, a breed of securities has delivered handsome risk-adjusted returns over the same period. We are talking about InvITs (investment in infrastructure trusts) and REITs (real estate investment trusts). While not only beating inflation, they have delivered healthy double-digit returns, while also being relatively less risky than pure equities.
Here we break them down, shine light on their outperformance and look at how to leverage them, going forward.
Brass tacks
InvITs and REITs, though popular globally, are only a recent phenomenon in India. Though SEBI had brought the legal framework back in 2014, it was not until May 2017 when IRB InvIT Fund (IRB InvIT) became the first InvIT to be listed on Indian bourses, and Embassy Office Parks REIT (Embassy REIT) the first REIT to be listed in April 2019.
Today, there are a handful of listed REITs and InvITs, including some recent listings. Some of them are privately placed and the minimum bid quantity is rather high at 25,000 units on those counters. In this story, we analyse only publicly-traded REITs and InvITs (minimum bid quantity starts at one unit) that have a listed history of at least three years. The list includes Powergrid Infrastructure Investment Trust (PGInvIT), IndiGrid Infrastructure Trust (IndiGrid InvIT) from the power sector, Embassy REIT, Mindspace Business Parks REITs (Mindspace REIT), Brookfield India Real Estate Trust (Brookfield REIT), Nexus Select Trust (Nexus REIT) from the commercial real estate sector and IRB InvIT from the highways space. While the combined market cap of the seven entities adds up to ₹1.6 lakh crore which is relatively small, the segment is beginning to make a mark.
SM REITs (small and medium REITs) are also outside the scope of this article. SM REITs manage properties valued between ₹50 crore and ₹500 crore and they have a higher entry ticket-size of ₹10 lakh.
Let’s now break down how REITs and InvITs work. At the core of both REITs and InvITs is a trust. The trust has stake in SPVs that hold infrastructure assets such as power transmission projects, toll highways and IT parks. Think of SPVs like subsidiaries of a company. The trust issues units like how a company issues shares, and investors of the trust are called unitholders.
REITs and InvITs are chiefly designed for delivering stable, annuity-like cash flows to unitholders. These cash flows are called distributions, similar to how dividends are for companies.
Let us now understand how earnings of SPVs flow to unitholders as distributions. You can refer to the waterfall chart. First, operating cash flows (EBITDA after working capital changes and tax) of SPVs (after retaining a sum for maintenance capex) accrue to the trust. This is called NDCF or net distributable cash flows. Next, the trust meets its own expenses from NDCF, including paying interest on its borrowings. The surplus after taxes is called NDCF at the trust level, and this is available for distribution to unitholders. SEBI rules stipulate that SPVs must distribute 90 per cent of their NDCF to the trust and that trusts must distribute 90 per cent of their NDCF to unitholders.
The need for REITs, InvITs
The primary purpose of REITs and InvITs is to help infrastructure companies monetise their income-generating assets. These companies incur massive upfront costs to build assets such as office buildings and roads, and often the costs are financed by debt. While the investment is upfront, the payback stretches through the lifetime of those assets — and therein lies the problem. Infrastructure companies cannot wait until their capital is ploughed back to invest in the next project. They may borrow of course, but the debt taken so far may be weighing on their balance sheet — making lenders disinterested. Enter REITs and InvITs.
Under the REIT/ InvIT model, an infrastructure developer floats a trust as its sponsor (like a promoter). The trust now raises funds by issuing units (like a company’s IPO). With the proceeds, it then buys completed/ cash-generating assets belonging to the sponsor — which in turn become its SPVs or portfolio assets.
The model also solves for investors who are not looking to directly invest in the infrastructure developer (which could entail taking on more risks), but rather looking for annuity-like, stable cash flows from mature assets in a regulated environment.
Key regulations
Here are a few SEBI regulations that concern InvITs and REITs.
• Completed and revenue-generating projects and properties must constitute at least 80 per cent of the trust’s assets.
• At least 90 per cent of NDCF must be distributed by SPVs and trusts to the trust and unitholders respectively.
• In case of REITs, net debt of the trust must not exceed 49 per cent of the fair value of its assets. It is 70 per cent in case of InvITs.
• Trusts must declare an NAV or net asset value per unit once after the quarter ending on September 30 and once after the end of a financial year in March. They must engage an external valuer to carry out the exercise.
Why trusts borrow?
When trusts issue units for the first time, they acquire the first set of income generating assets. Sometimes, these assets have a finite life and for instance, take the form of toll roads which are to be transferred back to the government after a certain time. Since 90 per cent of NDCF must be distributed, their NAVs would naturally decline, unless additional assets are acquired. The 10 per cent retained NDCF may not be sizeable enough to acquire assets.
So, trusts must either issue fresh units or borrow to grow. When they borrow, roughly the difference between the return on capital employed of the acquired asset and the cost of borrowing (cost of borrowing is lower than annual returns on acquired asset) contribute to incremental NDCF and NAV growth.
This is where the above regulation is relevant. Trusts must manage growth and at the same time adhere to the debt thresholds. Currently, all REITs and InvITs analysed here have enough headroom left (see chart).
Hybrid nature
REITs and InvITs are considered hybrid instruments. They exhibit the characteristics of both debt and equity instruments. The periodical, annuity-like distributions make them debt-like. At the same time, the units represent a claim over the residual net assets of the trust, making them equity-like. Unitholders enjoy returns both from cash distributions (measured by distribution yield) and change in the price of units (price returns).
Performance
Our analysis includes four REITs, two power InvITs and one road InvIT.
The REITs manage commercial real estate owned by their SPVs and earn rental revenue. The properties include office spaces, IT parks, malls (Nexus REIT) and even hotels let out to brands such as Hilton (Embassy REIT). Revenue and earnings growth can come from increase in occupancy rates and periodical rent escalations, apart from acquiring new properties.
PGInvIT and IndiGrid manage transmission projects that include transmission lines and sub-stations. The projects earn by making the assets available for operation for at least 98 per cent of the time. Revenue is as per tariffs bid for under TSAs (transmission service agreements). Tariffs are partly adjustable for inflation. TSAs are long-term and even run into 35 years, giving revenue visibility. Besides transmission, IndiGrid also earns revenue from generating solar electricity and battery energy storage systems. IRB InvIT’s road assets generate revenue from toll collections.
As observed from the table, on a total return basis, all seven trusts have beaten inflation, both over the last three and five years. Five-year CAGR returns range between high single-digits and mid-teens, while three-year returns range between 13 per cent and 22 per cent. This even as price returns for trusts such as PGInvIT and IRB not being impressive. IRB InvIT’s three-year total returns have been dragged down by negative price return, probably reflecting distributions per unit (DPU) showing a three-year CAGR of -6 per cent (Chart 2). PGInvIT’s flat price growth reflects DPUs that have not grown. Though Brookfield’s DPU has grown at a lower 2-per cent CAGR, its NDCFs have grown at a compounded 30 per cent CAGR in FY23-26.
InvITs trump REITs in terms of distribution yield at 10-13 per cent, while REITs have delivered about 6 per cent (Table 2). However, REITs have delivered better capital appreciation given their better growth prospects. All in all, these are better returns than what the Nifty has managed to deliver.
Also, look at Chart 3 that shows the performance of a hypothetical portfolio constructed five years ago with six REITs and InvITs that were listed then. An investment of ₹1 lakh is now worth nearly ₹1.65 lakh growing 1.65x in five years. The total returns CAGR on this portfolio is about 10.5 per cent, far exceeding the Nifty TRI’s 5.8 per cent in the same period.
Look at the price-to-NAV chart. While some trade at prices above the declared NAV, some trade slightly below. This reflects the market’s assessment, while the NAV reflects that of the valuer. Range data included here suggest how trusts have traded at a premium or discount to their NAVs in the last five years and can provide a perspective on when they are attractive relative to NAV.
Relationship of unit price with interest rates
There could be many factors that determine the movement of unit prices of REITs and InvITs — including fundamentals, decline in the value of portfolio assets (including lack of asset additions) even as distributions continue, change in fair-value estimates (valuation report said above) and market sentiment. However, the chief among them are interest rates.
Look at the table. Unit prices are generally seen to be rising in a rate cut cycle and falling in a rate hike cycle. To make sense of this, one needs to understand that like bonds, REITs and InvITs trade at a yield that is a spread over the risk-free rate. This is because investors are taking a risk by choosing a REIT or InvIT and expect higher returns. When repo rate (and consequently risk-free rate) is hiked, the unit prices of the trusts adjust downward to maintain the spread. The inverse is true in a rate cut cycle.
Note how in the rate hike cycle between May 2022 and February 2023, both price returns and total returns are negative. Cash distributions (factored in total returns) have provided some cushion to the deep cuts in unit prices. Prices rebound on a low base after reaching the end of the hike cycle.
Next up is the rate cut cycle between February 2025 and December 2025. Unit prices of all trusts are seen rallying invariably, with distributions bolstering returns. Since then, until early October, when rates were held at 5.25 per cent, price returns have moderated and can be seen to be lower than in the period of pause between October 2021 and May 2022.
That said, the RBI has embarked on a rate hike cycle now. Repo rate has been upped to 5.5 per cent since early October. It may so happen again that unit prices of these trusts decline, as seen earlier. When this happens, it may present buying opportunities. However, the magnitude of unit price decline may be dependent on how steep or shallow the rate hikes could get, which is anyone’s guess at this point. Nevertheless, from Table 4, it appears that the best time to invest appears to be the peak of an interest rate hike cycle.
Taxation of distributions
REITs and InvITs enjoy pass-through status (partially) just like mutual funds. The trusts do not pay tax on income earned from the SPVs and instead, it is the unitholders who pay tax.
Distributions by trusts to unitholders are not homogenous like dividends. They are instead a combination of dividend, interest, rent (in case SPV pays rent on properties owned by REIT), other income and repayment of capital. For example, IndiGrid InvIT declared a DPU of ₹4 for Q4 FY26. This is a mixture of ₹2.52 in interest, ₹0.1 in dividend, ₹0.14 in other income and ₹1.24 in repayment of capital. This bifurcation can be found in the ‘distribution advice’ mailed to the unitholders.
Interest, rent and repayment of capital are taxable for unitholders. Other kinds of income are taxable in the hands of the trust (partial pass-through status) and hence, exempt for unitholders.
As per the Income-tax Act, taxpayers need to maintain the original nature of income when filing returns. That is, interest must be disclosed as such under ‘income from other sources’ and rent under ‘income from house property’. The entire distribution amount should not be disclosed as a single amount under dividends. Both interest and rent are taxable at slab rates and a TDS of 10 per cent is applicable.
Until last year, dividends were partly taxed and partly exempt. However, by virtue of the Taxation and Other Laws (Amendment) Act, dividends have been exempted from FY27 for REIT, InvIT unitholders. This does not increase DPU for unitholders as tax is indirectly collected as a higher surcharge from the SPVs.
That leaves us with repayment of capital. This is taxed under income from other sources, however, only when cumulative distributions of this nature since inception exceed the issue price of the unit. Let’s simplify with an example. Assume the issue price of a unit of an InvIT is ₹100. Assume that so far, the InvIT has paid ₹35 as repayment of capital since inception, and it declares ₹10 more this year. This ₹10 will not be taxable. Assume that 10 years later, the cumulative repayment of capital has reached ₹97 and the InvIT declares ₹5 more in that year. Only in such a year, an amount of ₹2 (97+5-100) will be taxable.
Taxation of sale of units
Taxation of gains on sale of units of listed REITs and InvITs are no different from taxation of listed equity shares. The period of holding should exceed 12 months to qualify as a long-term capital asset. Long-term capital gains are taxed at 12.5 per cent and short-term gains at 20 per cent.
Published on October 24, 2026
