REIT revolution: Sebi’s stock reclassification sets the stage for major inflows and valuation re-rating

Over the past six years, the Indian REIT story has quietly but decisively matured. What started as a niche market focused on returns has grown into a mainstream DII-led equity product. Despite COVID, occupancy fluctuations and a rising interest rate cycle, India’s listed REITs have delivered strong, stable total returns. In doing so, they have increased investor confidence and established their position as a credible, well-regulated and lucrative asset class within Indian portfolios.

In most global markets, REITs have cap tables anchored by index funds and passive ETFs, in addition to long-only active managers, pensions and insurers. SEBI’s recent move to reclassify REITs from hybrid to equity instruments marks an important step in bringing this asset class in line with global standards, with clear implications for the liquidity, investor participation and valuation of this asset class.

Mainstreaming REITs via stock classification

Until now, REITs have been viewed as yield products, or quasi-debt instruments, but not fully comparable to listed equities due to their 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 the way capital flows into this space. As a direct result, REITs are now ready for index inclusion in major benchmarks. For example, Embassy REIT and Knowledge Realty could join the Nifty 500 and Nifty MidCap 150, while Mindspace REIT, Nexus REIT and Brookfield REIT qualify for the Nifty 500 and SmallCap indices. This marks an essential step towards mainstreaming the asset class, signaling that REITs no longer serve as peripheral instruments.

Why index recording is a game changer

For REITs, index inclusion is critical as it ensures a stable demand base through passive strategies, while at the same time putting them on the radar of active fund managers. However, the impact will be uneven as not all indices carry equal weight. Indices like the Nifty Midcap 150, SmallCap 50 and SmallCap 100 are widely followed with much higher AUM than others, meaning actual inflows will be concentrated around indices with higher institutional traction. Moreover, NSE’s methodology also takes into account the Average Daily Traded Value (ADTV) over six months. This ensures that only actively traded counters are included.

Beyond Flows: why this reorganization matters

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

• Revaluation of the valuation: Currently, most Indian REITs trade at a discount to their net asset value (NAV). With the increased liquidity, a sector-wide revaluation is possible. The global precedent is instructive. US REITs that once traded at discounts moved to NAV premiums in the early 2000s as the asset class matured.
• Liquidity: With the inclusion of the index, REIT counters are likely to witness an increase in secondary market activity, narrowing spreads and improving price discovery.
• Extensive investor universe: Domestic mutual funds, portfolio management services (PMS) and even global institutions can view REITs as other equity holdings

This shift could also spread to hybrid funds. As REITs migrate to the equity market, they may find additional room to participate in InvITs. This could unlock incremental flows for InvITs, further deepening the return-oriented product universe.

Looking ahead

As with all regulatory developments, the real test will now be whether inflows materialize, whether valuations converge to NAV, and whether the sector attracts long-term capital. SEBI’s move has laid a clear foundation for the development of REITs into a mainstream asset class, with the potential to reshape the way both domestic and global investors interact with Indian real estate markets.

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