I have a piece with Purva Mandale in today’s Economic Times that re-classifying REIT (Real Estate Investment Trusts) and InvITs instruments as equity would unlock a lot of capital to be directed towards real estate infrastructure.
We highlight how such a reform can:- Remove outdated restrictions on MF investments;
- Recognise the economic similarities between REITs/InvITs and equity shares;
- Enable global best practices like index inclusion and performance-linked returns;
- Broaden investor participation, deepen liquidity, and mobilise capital for growth.
Below is the unedited copy of the piece:
In a pivotal move set to redefine India’s capital markets, the Securities and Exchange Board of India (“SEBI”) has proposed to reclassify units of Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”) as ‘equity’ instruments. This proposal, detailed in SEBI’s April 2025 consultation paper, holds the potential to unlock significant capital flows into India’s foundational real estate and infrastructure sectors, crucial for driving the nation’s economic growth.
Since their launch in 2014, REITs and InvITs have steadily gained momentum in India. As of March 2024, India has 5 registered REITs and 24 InvITs, out of which a majority are listed, collectively managing substantial net assets, what started as a trickle is now a substantial number. In the financial year 2024, InvITs have raised over ₹33,000 crore – a more than five-fold increase from the previous year – and REITs mobilized close to ₹6,000 crore in investments.
Despite this evident momentum, these instruments remain considerably underutilized. REITs currently constitute only 12% of India’s listed real estate market capitalization and a mere 0.35% of the global REIT index. This stands in stark contrast to mature markets like the U.S., Australia, and the U.K., where REITs account for over 90% of listed real estate market capitalization. With India's real estate sector projected to reach $1 trillion by 2030 and infrastructure requiring a staggering $4.5 trillion in investment over the same period, the question is no longer about the potential of REITs and InvITs, but rather, how best to unleash it further as a means of development and progress.
Under SEBI’s current regulations for Mutual Funds, REITs and InvITs are categorized as ‘hybrid’ instruments. This classification imposes significant limitations on mutual fund investments, capping exposure at 10% of a scheme’s Net Asset Value and 5% per issuer, thus limiting mutual fund inflows. While these restrictions were reasonable when introduced in 2017 to manage a nascent market liquidity and concentration risks, they are arguably outdated given the current maturity and scale of these markets.
Further, the ‘hybrid’ classification limits the inclusion of REITs and InvITs in benchmark indices and discourages passive investment. Thus, these factors collectively limit liquidity and stunt price discovery. Reclassifying these instruments as equity would dismantle these barriers, more accurately reflecting their true financial nature and unlocking their full market potential.
Economically and structurally, the units of REITs and InvITs bear similarities to equity shares. These units represent a proportional beneficial interest in the trust's assets and cash flows, fundamentally differing from fixed debt obligations. Further, the absence of fixed maturity date and requirement of principal repayment supports the cause. The mandatory distribution of at least 90% of net distributable income to unitholders is directly linked to the performance of the underlying assets, mirroring the nature of dividends, which are declared from a company’s profits, rather than contractual payments akin to debt interest.
Furthermore, REIT and InvIT units are publicly listed, traded, and settled on stock exchanges, leveraging the same infrastructure as equity shares, including identical mechanisms for price discovery and trading. Unitholders possess the right to vote on crucial decisions, including asset acquisitions, borrowings, and managerial appointments, directly paralleling the governance rights of equity shareholders. On the taxation front, the Income Tax Act, 1961, already aligns the tax treatment of long-term capital gains on REIT/InvIT units with that of equities. Notably, even SEBI, when establishing the original investment caps in 2017, explicitly acknowledged these inherent equity-like traits.
International experience consistently demonstrates that the equity classification of REITs is rooted in their economic substance, not merely their legal structure. Whether organized as corporations or trusts, listed REITs in major markets like the U.S., UK, Singapore, and Australia share core characteristics with traditional equity securities. These include robust market liquidity, residual risk-bearing by unitholders, and a direct alignment of returns with performance.
These global jurisdictions have seamlessly integrated REITs into mainstream equity indices. This integration has been vital in boosting institutional participation, significantly lowering the cost of capital, and enhancing secondary market liquidity. In the U.S., for instance, REITs are fully integrated into major equity benchmarks such as the S&P 500 and the MSCI US REIT Index, enabling over 150 million Americans to invest in REITs through retirement plans and mutual funds, underscoring their mainstream acceptance. In Singapore, S-REITs constitute 10% of the SGX market capitalization. Australia’s A-REITs, embedded in the S&P/ASX 200, represent a significant portion of the global REIT market. These examples demonstrate how equity classification enhances mainstream integration, fosters greater liquidity, and boosts investor confidence. These international experiences underscore that the equity classification of REITs is driven by economic substance and their functional role within capital markets, not merely by legal form.
To propel REITs and InvITs into India’s investment mainstream, a focused set of regulatory reforms is needed. The first and most foundational step is to formally recognize REITs and InvITs as equity instruments. This reclassification would align regulatory treatment with the true economic nature of these instruments, characterised by residual ownership, market-based valuation, and performance-linked returns, and harmonize India’s approach with international standards adopted in mature REIT markets like the U.S., U.K., Singapore, and Australia.
Secondly, equity recognition would enable the inclusion of REITs and InvITs in major equity benchmarks such as the Nifty and Sensex. This is not merely a technical adjustment but a market catalyst. Index inclusion would unlock automatic inflows from passive investment vehicles, such as Exchange Traded Funds (ETFs) and index-linked mutual funds, thereby deepening liquidity, improving price discovery, and strengthening investor confidence in these instruments. These inflows will automatically incentivise more people to monetise their real assets freeing up capital for further construction of projects.
Rationalising these limits will empower mutual funds to respond to market dynamics more effectively, facilitating broader participation and accelerating capital formation in the real estate and infrastructure sectors. SEBI’s proposed reclassification is a strategic pivot poised to shape the next decade of investment in India. With a compelling economic rationale, strong global precedents, and growing investor interest, the case for formal equity classification is a reform whose time has come.
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