For the first time in India, the National Stock Exchange(NSE) has launched a new thematic benchmark-the Nifty REITs & InvITs 90:10 Index-to track the performance of the country’s listed Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This emerging index could potentially provide investors, asset managers and developers of financial products with an exclusive benchmark for a high-growth asset class that blends market-based income with predictable returns.
The launch comes at a time when REITs/ InvITs are seeing a surge in interests among Indian investors looking at alternatives to investments in equities and fixed income assets.
What is the Nifty REITs & InvITs 90:10 Index?
The updated index has been created by NSE Indices to cater to vis-à-vis of publicly listed REITs and InvITs. The index as indicated by its name has a minimum 90:10 allocation structure i.e., index will comprise of REITs for a minimum of 90% and InvITs for the balance 10%.
The index is made up of 13 listed components, and determined using a periodic capped free-float market kapitaisation methodology. The base date for the index is 1 April 2021 and the base value is 1,000.
The Index will be calculated at the end of every trading day and re-balanced at the end of March, June, September and December every year. This periodic rebalancing will be in order to ensure that the index remains representative of market capitalisation changes over time and the evolving universe of listed REIT and InvIT securities.
How does the index work?
The Index has a concentration limit to avoid excessive reliance on few securities: Max allowed weight of any individual security is 33% and the allowable weight of top 3 constituents is 62%.
This is important as the REIT and InvIT market that is pointed out above is a far lesser market to the larger equity market. Caps will be an effective tool to avoid one trust or a bunch of big constituents forming a dominant part of the whole index.
The index has a bias towards the real estate sector with smaller exposure to power, services and construction.
What are REITs and InvITs?
In addition, the structure provides the opportunity for investors to invest in, and make business decisions about, income producing commercial property without the need to buy, finance or manage the property directly. Most REITs own and manage properties such as office parks, commercial properties and shopping malls.
In contrast, InvITs offer investment exposure to infrastructure assets. These could comprise of infrastructure projects such as toll-roads, power transmission lines or similar assets which have stable cash flows.
Both schemes enable investors to access dec Large assets via listed units traded on the stock exchanges.
Why is the new index important?
The most important benefit of the new benchmark is that it introduces a benchmark performance benchmark for India’s listed REIT and InvIT market. Prior to this, investors and fund managers did not have many benchmarks to compare the performance of this unique asset class.
The proposed index can serve as the basis for creating financial instruments like mutual funds, exchange traded funds (ETFs) and other investment products based on REITs and InvITs as well.
A separate index may also help a fund manager to assess performance of the portfolio. While for investors it may represent a better indicator of the overall performance of the listed REIT/InvIT segment.
What has been the historical performance?
As per historical back tests data provided by NSE Indices, the index has achieved 1 year total return of 18.29% and 5 year CAGR of 12.72%. Since its launch, the index has returned CAGR of 13.07% (data to date).
The index also has a high dividend yield of 5.11%, indicating the income nature of REITs and InvITs. The beta value of 0.15 when tested against the Nifty 50 explains lower sensitivity to overall movements of broad equity markets.
Similarly, historical performance and back-tested returns are not indicative of future performance.
What does it mean for retail investors?
Uptake for retail investorsCould the launch of the Nifty REITs & InvITs 90:10 Index lead to increased transparency for investors in this emerging asset class. Enables investors to have a single benchmark to measure returns of listed real estate and infrastructure trusts.
Having said that, investors need to realize that REITs and InvITs are still market-linked products, and can therefore get impacted by factors such as interest rates, property valuations, demand for space, the overall economic scenario and overall market dynamics.
Simply put, the new index does not itself simply imply that investors can buy into the index directly. But it could be a future benchmark for any derivative investment products to track and follow its movement.
Bottom line
Established in October 2023, the launch of the Nifty REITs & InvITs 90:10 Index is a significant step towards creating a benchmark for the listed real estate and infrastructure investment market in India. Concentrating largely on REITs with a modest 10% presence of InvITs, the index offers a dedicated index for an asset class that could generate periodic income and the potential for long-term capital growth.
As the REIT and InvIT ecosystem develops, this new benchmark could help to facilitate better performance measurement and enable the launch of new investment products. For investors, it is a step towards providing a more transparent approach to measuring the development and performance of India’s listed real estate and infrastructure trusts.
