In the dynamic world of finance, investors are always looking for creative and profitable ways to increase their wealth. One such avenue that has attracted attention in recent years is infrastructure investment trusts, or InvITs.
These financial instruments are designed to revolutionize the way we invest in infrastructure projects, providing both stability and returns.
In this blog, we’ll have a deeper look at what InvITs are, how they work and why they are becoming an increasingly attractive option for investors.
Understanding InvITs (Infrastructure Investment trusts)
Infrastructure Investment Trusts, commonly known as InvITs, are a relatively new investment vehicle in India, introduced in 2014.
It is essentially a collective investment scheme that allows individuals to invest in infrastructure projects such as roads, highways, power plants and telecommunications without directly holding the underlying asset.
InvITs are structured similarly to real estate investment trusts (REITs), but instead of real estate, they focus on infrastructure assets.
How Do Infrastructure Investment Trusts Work?
InvITs are set up as trusts, and they are managed by a trustee, usually a financial institution or a bank. These trusts acquire income-generating infrastructure assets from project sponsors, such as developers or government bodies. These assets typically have long-term contracts or concessions in place, ensuring a steady stream of income.
Investors can buy units of an InvIT, which represents their ownership in the trust. The income generated from the underlying assets is distributed among the unit holders in the form of dividends. This income is often tax-efficient, making it an attractive option for income-seeking investors.
Type of Infrastructure Investment Trusts
Investors can invest in InvIT in two ways. One is directly or through specialized means, divided into two types.
Finished infrastructure projects
Completed revenue-generating projects can be underlying assets. They invite investors through a public offering.
Infrastructure projects under construction
It may have projects under construction as an asset. These investors pool money through private placements.
Structure of InvIT in India
SEBI (Infrastructure Investment Trust) (Amendment) Regulations, 2014, in India, governing InvIT. The structure is similar to a trust, and an independent trustee holds the income-producing assets on behalf of the unit owners.
It includes four elements:
- Investment managers
- Project managers.
It is important that the trustee is registered with SEBI as a bond trustee and invests at least 80% in income-generating infrastructure assets. The administrator also checks the performance of InvIT.
The sponsor is a company, limited liability company (LLP) or legal entity with a net worth of at least INR 1,000 million. They must hold at least 25% of the total assets of the InvIT with a lock-up period of three years.
3. Investment Managers
LLP is the company or organization that oversees the activities, assets, and investments of the InvIT.
4. Project manager
A project manager is a person with authority to oversee project activities and ensure timely project implementation as agreed. In the case of public-private partnerships (PPP), the project manager is also responsible for carrying out other ancillary activities of the project.
Why You Should Invest in InvITs ?
InvIT is a low-risk investment. Indeed, as per SEBI regulations, at least 80% of the investment must be made in completed or income-generating assets. Additionally, they can invest up to 10% in assets under construction. It reduces the most significant risk of building – delays in completion.
Predictable cash flow
InvITs provide stable and predictable cash flows. They must distribute 90% of the cash flow generated by the property to investors. Long-term investors looking for steady cash flow can consider this as an investment.
InvIT’s underlying assets are of high quality. They also have low demand, so price risk is low. Assets are typically transmission projects, gas pipelines, telecommunications towers, etc. The projected lifespan of these assets generally is 15 to 20 years, making them ideal for long-term investments.
InvIT has no lock-in period and can be easily traded on exchanges. They can be sold in the same way as open-end mutual fund shares. After SEBI reduced the lot of size to one unit, InvIT’s liquidity improved further.
Infrastructure investment trusts are a great diversifier. Investors who want to diversify their portfolio can consider investing in them as they do not face any price risk.
Risk Associated while investing in InviTs
When investing in InvIT, investors should be cautious of the following risks.
There may be delays in collection, one-time costs or even changes in tariffs. All of these affect the company’s cash flow. Therefore, investing in quality assets is very important.
Debt is the primary source of funding for most infrastructure projects. Interest rate fluctuations can cause refinancing risks.
They are relatively new to the investment scene and have strict regulations. Therefore, any regulatory changes could impact cash flows.
Public InvITs are traded on stock exchanges just like stocks. They may face capital gains and losses. Additionally, cash flow can vary from year to year because it depends on the underlying business. So, there is still uncertainty about returns.
The underlying assets of a REIT are commercial real estate such as offices, shopping malls, warehouses, etc. In contrast, InvIT’s underlying assets are infrastructure assets such as highways, power transmission towers, etc.
A REIT must be publicly traded, but an InvIT can be publicly sold, publicly traded, or unlisted.
Nearly 80% of REITs have long-term contracts attached to income-producing assets, ensuring a stable income. In contrast, InvIT cash flows could be more durable and depend on many factors, such as price scalability, capacity utilization and regulation.
REITs have better growth prospects because they own underlying assets, which increase in value over time. Additionally, the property can be repaired and redeveloped, which indicates better options. On the other hand, InvIT’s growth depends on asset acquisitions.
Accessibility to investors
REITs have low unit prices and trading lots and are, therefore, more liquid and more accessible to investors than InvITs.
Investors, both individual and institutional, should consider including InvITs (Infrastructure Investment Trusts (InvITs) in their investment portfolios.
However, it’s essential to conduct thorough research and due diligence before investing, as the performance of InvITs is closely linked to the health and efficiency of the underlying infrastructure assets.