Alternative Investments: Understanding REITs, InvITs And P2P Lending

Alternative investments are becoming quite popular these days beyond the traditional options of equities, bonds, or fixed deposits. Three of such popular avenues include Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs) and Peer-to-Peer (P2P) lending. Besides providing diversification, they also offer opportunities for higher potential returns.

1. Real Estate Investment Trusts (REITs)

REITs are firms that own, operate, or finance income-generating real estate in various sectors, such as commercial, residential, or industrial property. REITs aggregate funds from numerous investors; hence, it becomes possible for individuals to gain dividend income from real estate investments without the complexity of direct buying, managing, or financing properties.

Types Of REITs

• Equity REITs: These are real estate companies that own and operate income-generating properties, such as malls, offices, and apartment complexes.

• mREITs: Mortgage REITs borrow money or acquire mortgage-backed securities and receive payback through interest.

• Hybrid REITs: This includes a combination of both equity and mortgage REITs.

Why Invest In REITs?

• Accessibility: It allows retail investors to participate in real estate investment with lesser capital as compared to directly investing in a property.

• Liquidity: REITs are traded on the stock exchanges, so it offers more liquidity as compared to physical real estate.

• Diversification: REITs provide exposure to real estate investment, which is in most cases, an uncorrelated asset class.
  Regulated Structure: REITs come under the regulation of the Securities and Exchange Board of India (Sebi), thus providing protection and transparency to the investors.

Risk Associated With REITs

REITs are relatively risk-prone in regard to interest rate sensitivity as well as reliance on the performance of the real estate market.

2. Infrastructure Investment Trusts (InvITs)

InvITs are financial instruments conceptualised for the purpose of infusing investment into infrastructural projects, such as highways, power plants, and transmission lines, among others. InvITs gather funds from investors that are then used in investing in various infrastructure-generating assets. Thus, this allows retail and institutional investors to have a piece of these large-scale projects, which otherwise would have been impossible to access.

InvITs function in a manner similar to REITs but they differ in terms of their investment parameters. REITs invest in commercial or residential property, such as office space or malls, while InvITs invest in basic infrastructure assets that provide the core to economic development.

Advantages Of InvITs

• Regular Income: InvITs are designed to provide regular income in the form of dividends that will be generated from infrastructure projects, thereby providing investors with a steady cash flow.

• Diversification: They allow the inclusion of infrastructure in portfolios which traditionally has a lower correlation with other asset classes.

• Liquidity: Listed InvITs can be traded on the stock exchanges, which offer better liquidity than a direct investment in infrastructure.

• Low Barrier to Entry: InvITs offer access to large-scale infrastructure projects not dependent on large capital, bringing even retail investors under its purview.

Disadvantages Of InvITs

• Regulatory Risks: Infrastructure projects are likely prone to regulatory changes that tend to affect profitability.

• Sensitivity To Market: This is similar to how most market-linked instruments trade. Volatile markets can impact trade price.

• Limited Growth: Though income is steady, the growth potential is often less compared to equity investments.

• Economic Dependence: The performance of InvITs is highly dependent on the economic environment and government policies concerning infrastructure development.

3. Peer-To-Peer (P2P) Lending

P2P lending sites connect borrowers with lenders. This is a model in fintech through which people can borrow money from other individuals and the lenders can earn income by way of interest, which is typically higher than that offered on regular savings products.

How Does P2P Lending Work

Borrowers seek a loan on the site. They are rated against a criterion and assigned to a category of risk level. Lenders put money on the loans available on the platform. By interest generated by the paying borrower over time, the interest is accrued. The platforms that enable the transactions, earn charges, and often feature risk mitigation, such as pooling or guarantees.

Why Invest In P2P Lending

• Higher Returns: The P2P loans mostly tend to yield higher returns compared to fixed deposits and bonds, especially in risky classes.

• Flexibility: Investors can select the term, amount, and degree of risk as per their preference.

• Low Entry Barrier: Platforms generally permit investments with negligible initial capital.

Risks In P2P Lending

• Default Risk: The borrower may default, which could lead to loss.

• Regulatory Oversight: RBI regulates P2P platforms in India, but the market is still developing.

• Illiquidity: Investments here are not easily tradable like stocks, which freezes funds for the term of the loan.

How REITs, InvITs and P2P Lending Supplement Portfolios

REITs, InvITs and P2P lending target different investors with different risk appetites and goals. Both REITs and InvITs are alike in terms of their structure, and both are regulated by Sebi. The major difference, however, lies in the focus areas: REITs focus on real estate, whereas InvITs focus on infrastructure, thus making them more robust in times of economic crisis.

Unlike REITs and InvITs, P2P lending directly connects individual borrowers with lenders, enabling the funding of personal or business loans. While P2P lending offers higher potential returns, it comes with greater risks due to default possibilities. InvITs, being tied to large-scale infrastructure projects, are relatively more stable and predictable in terms of returns, albeit with moderate growth potential.

In combination, all three can help diversify an investor’s portfolio, balancing growth and income potential. However, as with any investment option, one should do research and know about the risk factors, and then invest in alignment with one’s personal financial goals.