With SEBI reclassifying REITs as equity assets in 2025, the segment has attracted growing interest from mutual funds and investors. Agarwal believes REITs offer a combination of regular income and moderate capital appreciation, making them suitable for investors looking to diversify beyond traditional asset classes.
According to Agarwal, REITs do not fit neatly into either the equity or debt buckets. While debt investments offer capital protection and relatively low volatility, equities do not provide the kind of regular cash flows that REITs generate.
“I would place REIT somewhere as a fourth asset class, what I call as a hybrid asset class. Along with equity, debt, gold, as well as REIT, as the fourth asset class.”
REITs primarily own income-generating commercial properties, and the biggest source of returns comes from rentals paid by tenants. Additional income can come from services provided within these properties, such as parking facilities and power distribution.
According to Agarwal, rental escalations, leasing of vacant spaces, renewals at higher market rates and acquisitions of new assets are among the major factors that drive growth in rental income and, in turn, investor returns.
Interest rates are another important factor influencing REIT performance. Since REITs compete with fixed-income products for investor money, higher interest rates tend to put pressure on valuations, while lower rates generally support prices.
For investors evaluating REITs, Agarwal recommends tracking distribution per unit (DPU), occupancy levels, debt on the balance sheet and plans for new acquisitions. These indicators offer a clearer picture of future cash flows and growth prospects.
REITs typically provide annual distributions of 6-10%, depending on the underlying assets, and enjoy equity-like taxation on capital gains, with long-term capital gains taxed at 12.5% after one year. Their ability to deliver regular quarterly payouts makes them suitable for investors seeking steady cash flows.
Given the regulatory framework governing distributions and property development, Agarwal considers REITs a relatively conservative and asset-backed investment option. He believes conservative investors can allocate 10-15% of their debt portfolio to REITs instead of traditional debt funds, bonds or government securities.
More aggressive investors seeking higher long-term returns and regular income can raise this allocation to 25-30% of their portfolio.
For the entire discussion, watch the accompanying video
