Should you invest in InvITs?
Infrastructure Investment Trusts or InvITs could offer superior risk-adjusted returns and eliminate volatility through visibility on the cash flows of underlying assets
For any developing economy, the growth and evolution of its infrastructure is key to improving its standard of living as well as leading to a higher rate of economic growth. Industry estimates suggest that infrastructure expenditure ranges from 30 to 50 percent of public investments, which creates immense scope for innovative investment products that can help the markets raise money to drive a nation’s development agenda. Infrastructure Investment Trusts or InvITs are an example of such innovative avenues that have been gaining momentum amongst a marquee of investors such as CPPIB, GIC, Brookfield, Blackstone, KKR, OMERs, Schroders, ACP, and IFC.
Approximately Rs 70,000 crore assets under management have been garnered by six InvITs and REIT listings, in three years, across roads, power transmission, commercial estate and gas pipelines.
There are several reasons for the rising interest in InvITs. By virtue of their structure, they offer superior risk-adjusted returns and eliminate volatility through visibility on the cash flows of underlying assets. Combining long-dated assets and liabilities with stable, diversified returns, they perfectly suit the investment objectives of insurance companies and pension funds. InvITs are good for global long-term investors, who prefer investing in operating infrastructure projects earning stable yields; long-only FIIs who invested at IPO, have remained so in the register.
A trifecta of interest rates, capital appreciation and dividend income are driving fund houses to bet on InvITs. With listed InvITs offering upwards of 13 percent yields, it provides a compelling value proposition on a risk-adjusted basis.
Owing to the regulations, InvITs predominantly own operating assets, insulating them from some of the infrastructure key risks, including financial closure, regulatory approvals, and time and cost overruns. As they are required to distribute a minimum of 90 percent of cash earnings to investors, it provides a stable and predictable yield. Additionally, what makes them a compelling investment in today’s uncertain times beset with high volatility is a reducing interest rate environment.
Such positive stance taken by regulators with regards to InvITs bodes very well in terms of enhanced liquidity and access to efficient borrowing sources, while these platforms continue to provide an inclusive ownership of Indian Infrastructure to a much larger investor base across the country.
With the recent regulatory developments, the outlook for InvITs continues to be optimistic. However, there is a need for various stakeholders to constructively address certain policy-related challenges. For instance, regulators such as IRDAI and PFRDA should enable insurance and pension funds to invest in the debt securities of InvITs, which will allow better ALM and provide an alternative as well as credible option to these investors for investing in debt securities. With Sebi’s continued promulgation of key regulation in this space, other regulators need to align and support the proliferation of InvITs to help spearhead India into a $5 trillion economy.