Are REITs Right For Your Portfolio?

Real Estate Investment Trusts (REITs) have stood out, generating gains even as broader indices, including the Nifty and Nifty Realty index, posted negative returns. This strength highlights the defensive nature of REITs, which benefit from stable rental income and a well-diversified asset base. The article examines the highs and lows of investing in REITs 

Over the past four months, the equity markets have witnessed a sharp downturn, with most indices, either sectoral or capitalisation-wise declining by over 20 per cent. In the last four months, nearly 77 per cent of the stocks have given negative returns and have fallen between 10 per cent and 70 per cent. Even Large-Cap stocks that form the top 100 by market capitalisation have declined by an average of 17 per cent in the same period. Amid this broad-based correction, a specific category of hybrid securities has displayed resilience and delivered positive returns. 

Real Estate Investment Trusts (REITs) have stood out, generating gains even as broader indices, including the Nifty and Nifty Realty index, posted negative returns. This strength highlights the defensive nature of REITs, which benefit from stable rental income and a welldiversified asset base. The chart (on the right side) illustrates the relative performance of all the listed REITs along with the Nifty 50 and Nifty Realty index, between September 27, 2024 and January 28, 2025. For example, in the last four months ending January 28, 2025, Nifty has declined by 13 per cent while the Nifty Realty index is down by a whopping 25 per cent. 

In the same period, most of the REITs generated positive return. It clearly demonstrates their outperformance compared to the key market indices, reinforcing their appeal as a defensive investment option during periods of market volatility. 

As investors seek stability amid uncertainty, REITs have emerged as a bright spot, offering both income and capital appreciation potential. 

What are REITs?
REITs were first introduced in the United States in 1960-61 through the Cigar Excise Tax Extension Act, allowing investors to gain exposure to large-scale, income-generating real estate portfolios. Since then, more than 30 countries have adopted REIT structures. In India, the Securities and Exchange Board of India (SEBI) established the regulatory framework for REITs in 2014 under the SEBI (REITs) Regulations, paving the way for real estate investment trusts in the country. 

REITs invest in a diverse range of real estate asset classes, including office buildings, residential complexes, warehouses, retail centres, medical facilities, data centres, cell towers, infrastructure projects, and hotels. Some REITs focus on specific segments, such as office REITs that own and lease office spaces, industrial REITs managing warehouses and logistics hubs and retail REITs investing in shopping malls and groceryanchored centres. Others maintain diversified portfolios, including residential REITs that cater to apartments and student housing, and timberland REITs that manage forested land for timber production. 

For investors, REITs provide an opportunity to invest in real estate much like stocks, mutual funds, or ETFs. Structurally, they function similarly to mutual funds, where sponsors— typically real estate developers—pool public investments to acquire income-generating properties. These assets are either directly owned by the REIT or held through Special Purpose Vehicles (SPVs) in which the REIT retains a controlling interest, ensuring steady income flow and asset management efficiency. 

The following diagram shows the structure of REIT in India 

As of the end of 2024, India has only four listed REITs, collectively covering around 125 million square feet of office and retail space. Compared to global markets, India’s REIT sector remains relatively small. Countries like the USA, Australia and the UK have significantly larger and more established REIT markets. However, REITs in India are gradually gaining popularity among both foreign and domestic investors, primarily due to their attractive dividend yields. Despite this growing interest, the market capitalisation of Indian REITs remains relatively low. Currently, REITs account for just 15 per cent of the total listed real estate sector in India, a stark contrast to mature markets like the USA, Australia, and the UK, where REITs represent over 90 per cent of the listed real estate space. 

Regulatory Environment Taxation of REITs: REITs are structured as a hybrid passthrough entity. Thus, certain types of income are exempt at REITs level and taxable at the level of unit-holders. REITs may have the following types of income: a) Rental income from real estate property; b) Capital gains from the transfer of real estate property; c) Dividend received from SPV; d) Interest received from SPV; and e) Any other income. 

Taxation on REIT Image 

REIT Performance versus Other Real Estate Investments 

In terms of returns, the major REITs in India, such as Embassy REIT, Mindspace REIT, Brookfield India REIT, and Nexus Select Trust REIT, have provided varying returns ranging from 5 per cent to 30 per cent since the start of 2021. On the other hand, the BSE Realty index and Nifty 50 have given 237 per cent returns and 149 per cent, respectively, in the same period. Nevertheless, this does not include yearly distribution of almost 5-6 per cent ever year. This shows that while REITs are generating decent returns, other real estate investments have offered significantly higher returns over the same period. 

Should you be owning REIT in your Portfolio? 

To understand the importance of REIT in your portfolio, we did a study. Here we evaluated the performance of three financial assets: Nifty 50 (an equity index), Mindspace Business Parks REIT (a real estate investment trust, also one the oldest), and a portfolio comprising 75 per cent of Nifty 50 and 25 per cent of Mindspace Business Parks REIT, rebalanced annually. The period under analysis spans from February 17, 2021 to January 27, 2025. The following table gives a glimpse of the performance of these three financial instruments. 

The analysis of Nifty 50, Mindspace REIT, and a diversified portfolio combining both assets offers valuable insights into their growth potential and risk profiles. Among them, Nifty 50 delivered the highest return, achieving a total gain of 50.10 per cent with a CAGR of 10.85 per cent. However, this came with a moderate maximum drawdown of -17.23 per cent. Mindspace REIT, in contrast, had a more limited total return of 21.74 per cent and a CAGR of 5.12 per cent, alongside the highest drawdown of -23.29 per cent. 

It’s important to note that these returns do not account for Mindspace’s dividend yield, which is estimated at 5-6 per cent annually. Additionally, the REIT’s recent performance may have been impacted by the post-pandemic recovery phase, potentially limiting its full growth potential. Despite this, Mindspace delivered strong short-term gains, outperforming both Nifty and the portfolio over the last year. 

A portfolio blending 75 per cent Nifty 50 and 25 per cent Mindspace REIT effectively captured much of Nifty’s growth while significantly reducing risk. It achieved a total return of 43.30 per cent with a CAGR of 9.56 per cent, while maintaining the lowest maximum drawdown at -12.17 per cent. More importantly, its risk-adjusted returns were superior, with a Sharpe Ratio of 0.96 and a Sortino Ratio of 8.58—higher than both Nifty and Mindspace individually. The portfolio’s Calmar ratio of 0.79 further underscored its resilience, outperforming Nifty (0.63) and Mindspace (0.22) in terms of return relative to the drawdowns. 

The strength of this portfolio lies in its diversification. By including Mindspace REIT, which has a low correlation with equities, the portfolio offers improved stability, particularly during volatile market conditions. Although its CAGR was slightly lower than Nifty’s, it provided a more balanced and consistent growth trajectory with reduced volatility and enhanced downside protection. Ultimately, the 75 per cent Nifty 50 and 25 per cent Mindspace REIT portfolio presents an attractive investment strategy, striking an optimal balance between growth potential and risk mitigation—making it a compelling choice for investors seeking steady, long-term returns with lower volatility. 

Reasons to Invest in REITs
Given that REITs primarily invest in rent-yielding commercial assets, the dynamics of Grade A office supply and demand play a pivotal role in their growth. This presents a significant opportunity for REITs to expand their footprint in India, leveraging the rising demand for high-quality office spaces to enhance their portfolios and deliver value to investors. Investing in REITs in India is particularly compelling at this juncture due to several current market dynamics in addition to what we have discussed above. 

1. Resurgence of Office Space Demand - The trend of remote working, which gained prominence during the pandemic, is witnessing a reversal. Companies are increasingly encouraging employees to return to physical offices, leading to a renewed demand for premium office spaces. Cushman & Wakefield India anticipates that the demand for premium office space across major cities will exceed 70 million square feet annually, with work-fromhome no longer posing a significant concern for the commercial real estate market.

2. Expansion of Global Capability Centres (GCCs) - India is experiencing a substantial influx of global capability centres. Since 2022, global companies have leased nearly 53 million square feet of office space across key cities like Bengaluru, Hyderabad, Chennai, Pune, and Delhi-NCR. This expansion underscores the growing demand for commercial real estate driven by multinational corporations establishing or enlarging their operations in India.

3. Favourable Market Dynamics Amid Equity Market Volatility - In times of equity market volatility, investors often seek stable income-generating assets. REITs, with their mandated distribution of at least 90 per cent of net rental income as dividends, offer a reliable income stream. This characteristic makes them an attractive investment alternative, providing both income stability and potential for capital appreciation, especially when traditional equity markets exhibit uncertainty. 

In summary, the current phase-out of widespread remote work, coupled with the aggressive expansion of GCCs and the inherent stability of REITs amidst equity market fluctuations, makes investing in Indian REITs a timely and strategic decision.