REITs are often viewed by investors as a fixed-income-like investment option. However, Radhika Gupta, MD & CEO of Edelweiss Mutual Fund, says this is a misconception. According to her, REITs are not fixed-income products but are classified as an equity asset class, and there is a reason why market regulator Sebi treats them as equity.
Gupta highlighted that investors should consider both returns and volatility when evaluating REITs. While equity market volatility in India has typically ranged between 14-16%, depending on the period considered, a pure-play REIT index has historically shown volatility of around 10-11%, which is lower than equities.
In a post on social media platform X, Gupta said that, “Let me bust a REIT myth: REITs are not fixed income. There is a reason SEBI classifies them as equity. Consider the numbers………………… Too many investors still think of REITs as fixed income. They aren't. They're an equity asset class with cash flow-generating real estate underneath.”
Gupta said REIT volatility is still significantly higher than what investors would generally associate with fixed-income investments, arbitrage funds or even many hybrid funds.
Global experience also supports this view. Listed REITs have historically behaved more like equities than bonds, with a long-term beta of around 0.6–0.7 against broad equity markets.
However, the factors driving REIT volatility can differ from those affecting conventional equities. According to Gupta, REITs are influenced by interest rates, property markets and occupancy levels, rather than corporate earnings alone.
Gupta said Edelweiss Mutual Fund’s proposed REIT-oriented fund — Edelweiss Nifty REITs & Realty Index Fund — in its current construct, has an expected volatility of around 13%, only modestly higher than that of the REIT index.
REITs vs traditional equities
While highlighting that REITs belong to the equity asset class, Gupta said an important difference lies in the source of returns.
A larger portion of REIT returns comes from regular income and cash flows, whereas traditional equities depend more heavily on earnings growth. REIT yields are typically around 5–6%, which is materially higher than the dividend yield of the broader equity market.
Why should investors consider REITs?
According to Gupta, investors should own REITs not because they are substitutes for debt — they clearly are not — but because of their key benefit: diversification.
REITs provide exposure to cash-flow-generating commercial real estate through a liquid and listed investment structure. Gupta compared their role in a portfolio to adding a Gold ETF or another real asset.
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She said, “In that sense, the investment case is similar to adding a Gold ETF or another real asset to a portfolio. It brings exposure to a different underlying asset, not a replacement for bonds.”
The objective, she explained, is to gain exposure to a different underlying asset rather than use REITs as a replacement for fixed-income investments.
Gupta believes investors should move away from the perception that REITs are equivalent to fixed-income products. Their regular distributions may make them appear debt-like, but their market behaviour, volatility and risk drivers are more closely aligned with equity investments.
For investors, therefore, the case for REITs lies primarily in diversifying a portfolio through exposure to commercial real estate and its cash flows, rather than replacing traditional fixed-income investments.
Edelweiss Mutual Fund has launched India’s first REIT-oriented index fund NFO — Edelweiss Nifty REITs & Realty Index Fund, which is open for subscription and will close on August 19.
The fund offers investors exposure to a portfolio of listed Real Estate Investment Trusts (REITs) and leading real estate companies through a single investment. The fund house describes it as “from skyline to portfolio, the new way to invest in Indian real estate.”
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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