SEBI Aims to Boost REIT Liquidity by Including Them in Indices

New Delhi’s markets regulator, the Securities and Exchange Board of India (SEBI), is taking steps to enhance liquidity for real estate investment trusts (REITs) by engaging with industry stakeholders to facilitate their inclusion in market indices. This announcement was made by Tuhin Kanta Pandey, SEBI’s Chairman, during the National Conclave on REITs and InvITs held on September 29, 2023.

In his address at the conclave, Pandey stated, “SEBI will work with all stakeholders to facilitate the inclusion of REITs in indices.” The move is anticipated to significantly improve liquidity for these investment instruments, which allow investors to own shares in high-value properties and earn dividend income. By integrating REITs into market indices, SEBI aims to make these assets more attractive to a broader range of investors.

New Measures to Enhance Investment Environment

In addition to the index inclusion, SEBI is exploring various initiatives to bolster the business environment for both REITs and infrastructure investment trusts (InvITs). This includes a proposal to expand the types of liquid mutual fund schemes that can invest in REITs and InvITs, while prioritizing investor protection.

Moreover, the regulator is assessing whether private InvITs could be permitted to invest in greenfield projects, ensuring that adequate safeguards are established. Pandey emphasized the importance of engaging with institutional investors to increase their participation in these financial instruments. To this end, SEBI has been collaborating with the Ministry of Finance, as well as state governments, to expedite public asset monetization.

“We are working with the Insurance Regulatory and Development Authority of India (IRDAI), the Pension Fund Regulatory and Development Authority (PFRDA), and the Employees Provident Fund Organisation (EPFO) to facilitate greater participation from their entities under their purview,” Pandey added.

Challenges and Opportunities in the Market

While acknowledging the vast opportunities presented by REITs and InvITs, Pandey recognized that the market remains nascent. He affirmed that SEBI would continue to provide a robust regulatory framework to support this sector. However, he urged industry sponsors, managers, advisors, and intermediaries to actively promote the potential of these asset classes to enhance depth and liquidity.

Despite the promising outlook, investor awareness has been identified as a significant barrier. Surveys indicate that only around 10 percent of potential investors are aware of REITs and InvITs, with penetration rates below 1 percent. “This must change,” Pandey stressed, advocating for retail investors to consider these instruments as viable components of their investment portfolios alongside equities, mutual funds, bonds, and bank deposits.

In recent months, SEBI has rolled out initiatives aimed at making REITs and InvITs more accessible to retail investors. A key development occurred in September 2023, when the SEBI board approved a reclassification of REITs as equity, while maintaining the ‘hybrid’ classification for InvITs. This change allows mutual funds to allocate investments in REITs within their equity limits, paving the way for increased investment flows.

“The reclassification as equity will enable equity mutual funds to allocate more meaningfully and facilitate index inclusion and passive flows,” Pandey explained. He also noted the reduction of entry thresholds for InvITs, which is expected to broaden participation and enhance liquidity.

Additionally, the establishment of the Maharashtra Infrastructure Investment Trust has been highlighted as a significant advancement in state-level infrastructure financing. Pandey also welcomed the National Highways Authority of India’s (NHAI) decision to create a public InvIT, which will be accessible to both domestic and retail investors. This initiative marks a pivotal shift towards increased public involvement in the development of India’s highway infrastructure.

As SEBI continues to implement these measures, the potential for REITs and InvITs to become integral parts of the investment landscape in India appears promising, provided stakeholders work together to foster a conducive environment for growth.