by 
Introduction
Recently, SEBI (Securities and Exchange Board of India) approved a major rule change. Real Estate Investment Trusts (REITs) will now be treated as equity instruments for mutual funds and specialised investment funds.
In contrast, Infrastructure Investment Trusts (InvITs) will continue to be classified as hybrid instruments.
This reform shows SEBI’s effort to bring India’s REIT market closer to global standards. It also aims to increase investor participation and build stronger confidence in the market.
What Changed? Key Aspects of the Reclassification
- REITs under Mutual Fund Regulations
- Earlier: Treated as “hybrid” instruments (a mix of equity and debt).
- Now: Classified purely as equity instruments.
- Mutual Fund Allocation
- Earlier: Limits and confusion existed on how much funds could invest in REITs and InvITs.
- Now: These constraints are removed. REIT allocations will count as part of equity exposure.
- Index Inclusion
- Earlier: Limited eligibility for inclusion in equity indices.
- Now: REITs can be considered for equity indices, boosting their visibility.
- Investor Base and Liquidity
- Earlier: Participation was narrower and liquidity was weaker.
- Now: The investor base is expected to widen, improving liquidity and overall trading activity.
Why SEBI Did It: Motivations and Global Comparison
- Alignment with Global Practices: In many mature markets, REITs are already treated as equity. Therefore, this move reduces regulatory gaps and aligns India with global standards.
- Boosting Capital Flow: The change is expected to attract more capital into real estate through mutual funds, pension funds, and other channels.
- Improved Liquidity and Market Depth: Equity classification will bring more visibility, higher trading, and narrower bid–ask spreads.
- Evolving Investor Demand: Institutions want steady income, diversification, and yield. REITs, under equity status, become easier to access through mutual funds.
Potential Benefits
- Greater Mutual Fund and Institutional Participation
As REITs now fall under the equity bucket, mutual funds can allocate more freely. As a result, capital inflows into the real estate sector will rise. - Index Inclusion
REITs may soon enter stock indices. Consequently, passive funds and ETFs will increase their demand. - Improved Liquidity
With more participants, trading volumes will rise. Therefore, secondary market activity will become stronger. - Lower Cost of Capital for Developers
Easier fundraising means developers will access cheaper financing. This, in turn, could reduce project delays and boost growth. - Broader Retail Participation
Retail investors will now gain easier exposure to REITs via mutual funds. This provides both diversification and long-term wealth opportunities.
Potential Challenges or Risks
- Valuation and Volatility
Although REITs are more stable than many real estate assets, they still carry equity-like risks. Therefore, volatility may increase. - Concentration Risk
Currently, only a few REITs are listed in India. If funds concentrate heavily in them, risks could rise. - Regulation and Tax Ambiguities
Tax treatment of dividends and capital gains may cause confusion. Clearer rules will be needed. - Liquidity Still Limited
Even with equity status, low trading volumes in some REITs may persist in the short term. - Investor Education
Many investors still do not fully understand REITs. Without awareness, mispricing or over-investment could occur.
Likely Impacts on the Real Estate Investment Landscape
- Growth in the Number of REITs
More developers are likely to launch REITs, especially for office parks, retail spaces, and warehousing. - Stronger Listing Activity
With better visibility and investor appetite, more REITs will list on stock exchanges. - Shift in Mutual Fund Portfolios
Balanced and multi-asset funds may now increase real estate exposure through REITs. - Evolving Funding Models
Developers may prefer REITs for raising capital rather than relying solely on debt. - New Product Innovation
Expect ETFs, index funds, and structured products focused on REITs, tailored for both retail and institutional investors.
Case Examples
- After SEBI’s announcement, India’s five listed REITs rose by up to 8% in just two trading sessions.
- Mutual funds can now officially treat REITs as equity investments, easing internal allocation constraints.
What This Means for Stakeholders
- Retail Investors: Gain easier access, better diversification, and stable income. However, they must watch for volatility, dividend risks, and tax implications.
- Mutual Funds and Institutions: Enjoy more flexibility in allocations and better global alignment. Yet, they must manage risk and avoid over-concentration.
- Developers and Owners: Get improved valuations and easier capital raising. But they need to maintain transparency and occupancy to stay attractive.
- Regulators: Move closer to global standards and deepen markets. At the same time, they must ensure investor protection and clarity in tax laws.
Long-Term Outlook
If implemented well, India’s REIT market could grow quickly in the next 5–10 years. This growth would attract both Indian and global investors. It could also lead to new products and make real estate a more open and transparent asset class.
In addition, future REITs may expand into retail, warehousing, and mixed-use projects. Some may even create smaller “micro-REITs” for easier access. At the same time, global investors are likely to demand ESG-compliant assets. As a result, developers may shift toward greener and more sustainable practices.
Conclusion
SEBI’s move to classify REITs as equity is more than a rule change—it shows India’s push to build a stronger and globally competitive real estate market.
The reform brings clear benefits like wider participation, better liquidity, and improved funding. Yet, challenges such as taxation clarity, investor awareness, and liquidity must still be solved.
Overall, this could mark the start of a new era in India’s real estate investment, offering lasting gains for both investors and developers.
Join The Discussion