I suppose that REITs and INVITs are just like real estate mutual funds. Why are they so critical in the Indian investment context for project developers?

In a nutshell, REIT is like a mutual fund with a portfolio of commercial realty assets while the INVIT is like a mutual fund with a portfolio of infrastructure assets like bridges and toll roads. Both REITs and INVITs are similar in concept and they only differ in the end assets that they invest into. Both these products offer benefits to the project developer and to the investor in these products. Let us look at some of these key benefits and how project developers benefit from REITS and InvITs?

Most real estate projects and infrastructure projects are plagued by illiquidity. This makes entry and exit into such projects difficult. REITS and InvITs offer a viable exit route for developers, who can monetize either part of the project or their entire project. Currently, the absence of exit routes is keeping many serious players from getting into this business in a big way. REITS will provide an answer to this problem.

A very important benefit for the project developer is that these REITs and InvITs provide them an opportunity to convert their asset heavy models into an asset-light model. Typically, infrastructure developers have expertise in operating the infrastructure not in keeping huge assets in their books. InvITs and REITs will enable these developers to actually reduce their balance sheet size and consequently improve their ROI.

In India, many real estate projects are stalled due to absence of last-mile funding. This leaves many property buyers also in the lurch. Most banks have become very strict on exposure to real estate and hence bank funding has become a lot more selective. Under these circumstances REITs can plug a major funding gap.

Lastly, it also gives developers and infrastructure project owners an additional source of funding. Most Indian PSU banks are sitting on a pile of bad infrastructure loans and fresh funding is not forthcoming. This is also a long term funding source and does not impose financial burden like bank funding. It helps the financial viability of projects.