REIT revolution: Sebi’s equity reclassification sets stage for big inflows and valuation re-rating – News Air Insight

Over the last six years, India’s REIT story has quietly but decisively come of age. What began as a niche, yield-seeking play for FIIs has evolved into a mainstream, DII-led equity product. Despite COVID, occupancy swings and a rising-rate cycle, India’s listed REITs have delivered strong, stable total returns. In doing so, they have deepened investor confidence and established their footing as a credible, well-regulated and lucrative asset class within Indian portfolios.

Across most global markets, REITs have cap tables anchored by index funds and passive ETFs, alongside long-only active managers, pensions and insurers. SEBI’s recent move to reclassify REITs from hybrid to equity instruments marks a significant move to align this asset class with global standards, with clear implications for liquidity, investor participation, and valuation of this asset class.

Mainstreaming REITs through equity classification

Until now, REITs were seen as yield products, or quasi-debt instruments, but not fully comparable with listed equities due to the risk and return profile. By bringing them under the equity umbrella, SEBI has opened the door for both domestic and global institutional investors to treat REITs as part of their core equity allocation, a move that could fundamentally change how capital flows into this space.As a direct result, REITs are now set for index inclusion across key benchmarks. For instance, Embassy REIT and Knowledge Realty could join the Nifty 500 and Nifty MidCap 150, while Mindspace REIT, Nexus REIT and Brookfield REIT qualify across Nifty 500 and SmallCap indices. This marks an essential step toward mainstreaming the asset class, signalling that REITs no longer serve as peripheral instruments.

Why index inclusion is a gamechanger

For REITs, index inclusion is critical because it ensures a steady base of demand through passive strategies while also putting them on the radar of active fund managers. However, the impact will be uneven given that not all indices carry equal weightage. Indices like the Nifty Midcap 150, SmallCap 50, and SmallCap 100 are widely tracked with a far greater AUMs than others, meaning actual inflows will cluster around those with higher institutional traction.Further, NSE’s methodology also considers the Average Daily Traded Value (ADTV) over six months. This ensures that only actively traded counters get included.

Beyond flows: Why this reclassification matters

Index inclusion is just one part of the story. The larger significance lies in how this reclassification addresses long-standing investor concerns.

• Valuation re-rating: Currently, majority Indian REITs trade at a discount to their Net Asset Value (NAV). With increased liquidity, a sector-wide re-rating is possible. Global precedent is instructive. U.S. REITs that once traded at discounts moved to NAV premiums in the early 2000s as the asset class matured.
• Liquidity: With index inclusion, REIT counters are likely to witness a step-up in secondary market activity, narrowing spreads and improving price discovery.
• Expanded investor universe: Domestic mutual funds, portfolio management services (PMS), and even global institutions can look at REITs as other equity holdings

This shift could also spill over to hybrid funds. With REITs migrating into the equity basket, they may find additional headroom to participate in InvITs. This could unlock incremental flows for InvITs, further deepening the yield-oriented product universe.

Looking ahead

As with all regulatory developments, the true test will now be in execution: whether the inflows materialise, whether valuations converge toward NAV, and whether the sector attracts long-term capital. SEBI’s move has laid some clear groundwork for REITs to emerge as a mainstream asset class, with the potential to reshape how both domestic and global investors engage with India’s real estate markets.

(The author is Managing Director and Head, Equity Capital Markets, Avendus Capital)