SEBI’s move to classify REITs as equity instruments has caught the market’s attention. What seems like a dry regulatory tweak is actually opening doors for the real estate sector, fund managers, and retail investors alike. Mandar Wagh unpacks the REIT story, from bricks to equity, highlighting how they can reshape portfolios, their key opportunities and risks, the performance of listed REITs, and strategies investors should know
Understanding REITs
Real Estate Investment Trusts, or REITs, are investment vehicles that allow investors to invest in income-generating real estate assets without directly owning property. Modelled after mutual funds, REITs pool money from investors to purchase, operate, or finance commercial real estate such as office buildings, shopping malls, hotels, warehouses, and data centres. In return, investors earn dividends derived mainly from rental income and capital appreciation.
One of the key features of REITs is their obligation to distribute at least 90 per cent of their net distributable income to unitholders, ensuring a steady income stream for investors. REITs were introduced in India to offer a transparent and efficient way for investors to participate in the real estate sector, traditionally dominated by high entry barriers and low liquidity. The Securities and Exchange Board of India (SF.BI) formally introduced the REIT framework in 2014, paving the way for real estate to become a more accessible investment option.
There are three main types of REITs: Equity REITs, which own and operate income-generating real estate; Mortgage REITs, which lend money to property owners and developers; and Hybrid REITs, which combine both ownership and financing activities. In India, most REITs fall under the equity category. These primarily invest in Grade A commercial office spaces across major Indian cities like Delhi, Bengaluru, Mumbai,
Pune, and Hyderabad. As India’s real estate sector matures and investor awareness grows, REITs are emerging as a crucial bridge between real estate and capital markets.
The Regulatory Turning Point
Lets begin by understanding what changed and why. REITs were earlier viewed more like hybrid instruments: part real estate (stable rent yields) and part fixed income (because of predictable distributions). But they lacked the pure equity tag that allows them to count toward equity mandates in mutual fund schemes. In September 2025, SEBI formally reclassified REITs as equity instruments, which will be beneficial to all class of investors, however, mutual funds will be benefited more. This means REITs will now be counted in a fund’s equity allocation.
Why did SEBI do this? The move is meant to align India with global practices, boost liquidity in REITs, broaden investor participation, and make REITs eligible for inclusion in equity indices. Proponents argue REITs behave more like equities in the medium-to-long run: their returns come from both distributions (rent) and capital appreciation (market re-rating). The reclassification also comes alongside other adjustments in REIT regulation.
The 2025 amendments introduced more operational clarity, Strengthened governance norms, and eased processes around fund raising and disclosures. These changes serve to reassure investors and asset managers that REITs are more ‘market-ready’ than ever before. Let me illustrate with a metaphor. Imagine REITs before as a hybrid vehicle, part car and part train, limited in how far it could travel on each track. After this change, REITs now get full access to the equity highway. The result: more speed, more options, more traction.
Why REITs Belong in Your Equity Portfolio
This reclassification is not cosmetic. It changes how fund houses can think about REITs in their scheme design, how portfolio managers can deploy them, and how retail investors might view them as part of tbeir equity mix. Here are some key factors that give REITs a distinct advantage:
■Inclusion in Equity Allocations: With REITs now classified as equity, mutual fund managers can include them within their existing equity portfolios without breaching mandates. This allows retail and institutional investors to gain commercial real estate exposure seamlessly through familiar equity instruments.
■Liquidity Advantage: Unlike direct real estate investments, REIT units are listed on stock exchanges, making them easy to buy or sell. Investors can access real estate returns with the flexibility and speed of trading regular equity shares.
■Diversification: Adding REITs to a portfolio introduces exposure to commercial real estate, providing a new asset class alongside equities and bonds. This helps cushion portfolios against sector-specific volatility while offering an additional layer of income.
■Income Plus Growth: REITs provide investors with a combination of rental income and potential capital appreciation. This dual benefit creates a balanced investment option that can deliver steady cash flows while participating in the long-term growth of property values.
■Benchmark’and Indexlndusion: REITs can now be part of equity indices, allowing index funds, ETFs, and passive strategies to include them. This enhances visibility, attracts institutional flows, and integrates REITs into mainstream portfolio construction.
■Flexible Allocation Strategy: investors can allocate a portion of their equity exposure, typically two to five per cent, to REITs. This enables a balanced approach combining growth, dividend, and yield, while avoiding the need for separate real estate funds.
■Access to Professional Fund Management: Mutual funds and PMS schemes can now include REITs within equity mandates, giving investors professionally managed exposure to high-quality commercial properties without needing to directly purchase or manage real estate assets.
■Enhanced Institutional Participation: Equity classification makes REITs more attractive to institutional investors such as pension funds, insurance companies, and sovereign wealth funds. This could increase market depth, improve liquidity, and support long-term stability in REIT valuations.
Risks You Can’t Ignore
It would be remiss not to discuss what can go wrong. While the equity classification brings new opportunities, REITs still carry inherent risks. Investors remain exposed to factors such as interest rate fluctuations, real estate market cycles, and property-specific issues, meaning returns are not guaranteed and careful evaluation is essential before investing.
■Interest rate sensitivity: REIT yields are often compared to returns from fixed-income instruments like bonds or FDs. When interest rates rise, borrowing costs increase and dividend yields may seem less attractive, which can put downward pressure on REIT valuations.
■Real estate cycles: The performance of REITs is closely tied to the commercial real estate market. Factors such as leasing demand, vacancy rates, and rent revisions directly impact income. A slowdown in offices, malls, or warehouses can reduce distributions to investors.
■Leverage and refinancing risk: REITs often use debt to boost returns on equity. Rising credit costs, tighter lending norms, or difficulty refinancing existing loans can
■ increase financial pressure, potentially affecting overall profitability for investors.
■Concentration risk: India’s REIT market is relatively small and dominated by office properties in major cities like Mumbai, Bengaluru, and Pune. High concentration in a few sectors or geographies exposes investors to specific market or regional downturns.
■Valuation mismatch: REITs are traded on exchanges, and market prices can sometimes overshoot or lag behind underlying property fundamentals. Such valuation discrepancies can create volatility, leading to short-term price swings despite stable rental income streams.
India’s Leading REITs: Growth, Yields, and Insights
To illustrate the investment potential, let’s examine the performance of some of India’s listed REITs, looking at a combination of yield, capital appreciation, and operational metrics. Currently, the country has five listed REITs: Embassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust, Nexus Select Trust and recently listed Property Share Investment Trust – Propshare Titania. Looking at the most recent quarterly performance, India’s listed REITs collectively (except for recently listed REIT) reported a 14 per cent year-on-year revenue growth in Q1EY26 compared to Q1FY25, with all four REITs delivering double-digit growth individually.
This notable top-line performance reflects strong leasing demand, healthy occupancy levels, and rising rental incomes across commercial properties. The bottom-line performance was somewhat mixed, but aggregate net profit still surged around 16 per cent year-on-year. This indicates that while some operational or financing costs varied across REITs, overall profitability remains resilient, supported by efficient cost management and steady rental collections. One of the standout features of REITs is their consistently high operating profit margins, exceeding 70 per cent over several financial years, which is a norm globally.
Such margins are a testament to the low operational leverage and efficient property management practices, allowing REITs to convert a large portion of rental income into profits. Thanks to this robust earnings capacity, investors benefit from attractive income streams. Current dividend yields for these REITs are around 4-6 per cent, supported by triple-digit payout ratios. High dividend payouts are possible because REITs are required to distribute a major portion of their earnings to unitholders, making them a reliable source of regular income alongside potential capital appreciation.
When factoring in capital appreciation, REITs have delivered respectable stock returns on top of dividend income. The recent equity classification by SEBI triggered a notable rally in REIT stocks, reflecting renewed investor confidence. REIT stocks jumped 5-6 per cent immediately following the announcement, signalling strong investor interest and a positive market response. And this.could be just the beginning, given their growing visibility and appeal, REITs are expected to attract increasing interest from both retail and institutional investors in the future.
Strategies Every Investor Should Know
Even with broader optimism, given the relatively short history of REITs in India and the various factors that can influence their performance, investors should view past results as signals rather than guarantees. Here are some key suggestions that investors should keep in mind:
■ Be selective – Do not buy all REITs indiscriminately. A careful, bottom-up approach is essential. This means evaluating each REIT individually, considering the quality and location of its properties, ongoing and upcoming projects, sector and geographical concentrations, financial fundamentals, and management track record.
■Revisit your equity allocation – Consider carving out a small REIT exposure, say 2 to 5 per cent, within your equity umbrella. Think of it as equity with income.’
■Stay diversified – REITs should complement, not replace, your mainstream equity or debt exposure.
■Use REITs for stability in volatile markets – They can act as a partial buffer when equity markets become choppy.
■Compare yield versus growth trade-off – In your equity universe, some stocks yield dividends, while REITs offer a more income-heavy option. Use them to balance aggressive grow’th names.
■Watch macro trends closely – REITs are sensitive to interest rates and real estate cycles, so monitor inflation, RBI rate changes, and commercial property demand.
■Read mutual fund schemes’ disclosures – Observe which funds begin including REITs in their equity portions to gauge how fund houses are positioning them.
Concluding Thoughts
At first glance, reclassifying REITs as equity might seem technical or incremental. But in markets, such technical shifts often unlock fresh capital flow’s, change benchmarks, and shift investor behaviour. For the common investor, the change gives you a new tool to access real estate income, plus capital upside, in a liquid, tradeable form. For fund managers, it opens a new dimension of scheme design and asset allocation. For the real estate sector, it promises deeper capital and broader participation. Over time, w’e may see more REITs being launched, new hybrid-equity real estate funds, or indices that combine stocks and REITs.
Perhaps REITs will become mainstream components of large equity portfolios rather than exotic line items. But none of that will happen overnight. The key step has been taken; REITs now have ‘equity currency.’ The next chapters will be written by fund houses, investors, and the pace of listings. For now’, this is a fresh doorway into a new’ phase of investing and one worth walking through. While REITs are emerging as an attractive investment avenue, investors should tread with a measure of caution. Their performance often moves in line with interest rates, and when rates rise, REIT yields can become less appealing.
Returns also depend on rental income and occupancy levels, which fluctuate with economic and real estate cycles. Although REITs offer better liquidity than owning property directly, they can still face sharp price swings during market volatility. Moreover, since REITs must distribute most of their earnings as dividends, their ability to reinvest and grow can be limited. In short, REITs can add valuable real estate exposure and income to your portfolio, but they work best for investors with a long-term view, a diversified approach, and an eye on economic indicators. We’d love to hear your perspective. Are you ready to include REITs in your portfolio?