REITs aren't debt substitutes, they're equity investments with cash flows: Radhika Gupta

Real Estate Investment Trusts (REITs) should not be viewed as fixed-income investments despite their regular income payouts, according to Radhika Gupta, Managing Director and CEO of Edelweiss Asset Management Company. Instead, REITs are an equity asset class that can help investors diversify their portfolios through exposure to commercial real estate.

In a post on X, Gupta said there is a reason the Securities and Exchange Board of India (SEBI) classifies REITs as equity instruments rather than debt products. "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," she wrote.

Volatility closer to equities than debt

Gupta pointed out that the risk profile of REITs is much closer to equities than to fixed-income investments. According to her, equity markets in India have historically exhibited annual volatility of around 14-16%, while a pure-play REIT index has recorded volatility of roughly 10-11%. Although slightly lower than equities, it remains significantly higher than debt funds, arbitrage funds or many hybrid schemes.

She added that globally listed REITs have also behaved more like equities, with a long-term beta of around 0.6-0.7 relative to broader equity markets.

However, the factors driving REIT performance differ from those influencing conventional stocks. REITs are primarily affected by interest rates, commercial property demand, occupancy levels and rental income rather than corporate earnings growth.

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Income generation sets REITs apart

While REITs are classified as equity, Gupta noted that their return profile differs from traditional stocks. A larger share of REIT returns comes from recurring rental income and cash flows, whereas equity investments rely more heavily on earnings growth and capital appreciation.

She said REITs typically offer yields of 5-6%, considerably higher than the dividend yield available on the broader equity market.

Role in a diversified portfolio

According to Gupta, the primary reason to invest in REITs is diversification, not income replacement.

She said REITs provide investors with access to cash flow-generating commercial real estate through exchange-listed securities, offering liquidity that physical property investments often lack.

Comparing their role to that of a Gold ETF or other real assets, Gupta said REITs introduce exposure to a different underlying asset class rather than serving as a substitute for bonds or other fixed-income investments.

Her comments come as Edelweiss Mutual Fund has launched the Edelweiss Nifty REITs & Realty Index Fund, which seeks to provide passive exposure to listed REITs and real estate companies through a single investment product.

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India's first REIT-focused index fund

Gupta's comments come on the same day Edelweiss Mutual Fund launched the Edelweiss Nifty REITs & Realty Index Fund, India's first index fund tracking a REIT-focused index. The New Fund Offer (NFO) opened on August 5 and will close on August 19. The passive scheme seeks to replicate the Nifty REITs & Realty Total Return Index (TRI), offering investors exposure to listed REITs as well as real estate companies through a single fund.

The fund aims to address some of the challenges of investing in REITs directly. While investors can buy listed REIT units on stock exchanges, the periodic distributions—comprising interest, rent and, in some cases, dividends—are generally taxed at the investor's applicable income-tax slab rate. In contrast, distributions received by the mutual fund are not taxed at the fund level, and investors are taxed only when they redeem their units. Since the scheme is not classified as an equity-oriented fund for tax purposes, long-term capital gains tax of 12.5% applies after a two-year holding period.

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However, the fund is not designed to replicate the low-volatility characteristics often associated with fixed-income products. The underlying index currently allocates around 60% to listed REITs and 40% to listed real estate stocks, meaning its return profile remains closely linked to equity markets. This aligns with Gupta's view that REITs should be seen as a diversification tool within an equity portfolio rather than as a substitute for debt or fixed-income investments.