Assets under management (AUM) of infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) in India are seen soaring 15-20% on-year to Rs 7.5-8.0 lakh crore next fiscal.

Strong revenue visibility and long life of assets will keep credit profiles robust despite a slight increase in leverage.

An analysis of 13 InvITs and 4 REITs rated by CRISIL Ratings, which is 90% of the universe, indicates as much.

The inherent advantages in the trust structure for developers, investors and lenders, and proactive regulatory changes continue to support the AUM growth of InvITs and REITs.

AUM grew multifold between fiscal 2018 - when the first such trust was listed in India - and fiscal 2021, followed by healthy compound annual growth rate of 18% over the two years through fiscal 2023 (chart in annexure).

The momentum has continued in this fiscal with Rs ~1.3 lakh crore added to AUM. Of this, 55% was from six new trusts and the remaining through asset acquisitions in the existing ones.

This fiscal also saw new sectors such as retail malls, warehouses and renewables come into the fold, even as the road sector accounted for almost half of the AUM addition.

Says Manish Gupta, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “The road sector will continue to dominate, accounting for almost three-fourths of the Rs 1-1.5 lakh crore additional AUM expected in fiscal 2025. This is due to the strong availability of road assets, driven by the healthy pace of infrastructure creation and many assets being ripe for monetisation. To be sure, the inherent advantages of trusts that allow developers to unlock equity, deleverage balance sheets, gain access to long-term institutional investors and derive tax benefits will continue to support the AUM growth across sectors.”

Other fundamental features of the trusts such as cap on leverage, mandatory distribution of 90% cash flow and the limit on proportion of under-construction assets benefit both investors and lenders.

At present, ~50% of the equity in trusts is held by foreign investors. That said, participation by domestic investors is on the rise, supported by proactive regulatory changes such as allowing investments by insurance and pension funds and decreasing the lot size to increase retail participation. For instance, shareholding by retail investors in publicly listed trusts increased to 18% in first half of fiscal 2024 from 12% in fiscal 2021.

With regulatory leverage (ratio of debt to AUM) increased from 49% to 70%¹, the expansion in AUM has been accompanied by a modest rise in leverage as existing trusts have funded new acquisitions largely through debt.

Says Nitin Bansal, Associate Director, CRISIL Ratings, “The consolidated leverage of InvITs and REITs has increased from 40% in fiscal 2021 to ~46% currently and is expected to be 47-48% by next fiscal. Still, credit profiles are expected to be strong, supported by stable and predictable cash flows, long life and diverse pool of assets and moderate to low counterparty risks. The regulatory stipulation of maintaining a ‘AAA’ credit rating while increasing leverage for InvITs will also help.”

In the road ahead, increasing the depth of debt markets along with a deeper understanding of operating and credit risks among investors and unitholders will help accelerate the growth of InvITs and REITs.

¹ InvITs can increase their leverage up to 70% post six consecutive distributions subject to the credit rating of ‘AAA’, while the borrowing limit for REITs is fixed at 49%.