REITs Outperform Realty Stocks: A 29% Return in 1 Year Amidst Market Volatility

Real Estate Investment Trusts (REITs) have outperformed traditional realty stocks, delivering up to 29% returns over the past year, while realty stocks have fallen by as much as 37%. This article explores the reasons behind REITs' success and the impact of Sebi's equity status reclassification.

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REITs Outperform Realty Stocks: A 29% Return in 1 Year Amidst Market Volatility

Real Estate:REITs, or Real Estate Investment Trusts, have been making headlines for all the right reasons. Recently, the capital markets regulator Sebi granted REITs equity status, a move that has further bolstered their appeal to investors. Beyond the headlines, listed REITs have quietly delivered strong performance, posting returns of up to 29% over the past year, even as realty stocks have slumped as much as 37%. Experts attribute this outperformance to REITs' ability to generate stable income and the enhanced status they now enjoy.

REITs are companies that own, operate, or finance income-generating real estate such as office buildings, shopping centers, apartments, hotels, and warehouses. They allow individuals to invest in large-scale real estate projects without taking on direct ownership. Much like mutual funds, REITs pool money from investors and distribute the bulk of their taxable income to shareholders in the form of dividends.

Currently, there are four listed REITs in India. Mindspace Business Parks REIT has been the top performer, delivering 29% returns over the past year, followed by Brookfield India Real Estate Trust with 17%. Nexus Select Trust and Embassy Office Parks REIT have returned 12% and 4.2%, respectively.

In sharp contrast, realty stocks have struggled — with the Nifty Realty index slipping 20% in the past year. Godrej Properties led the decline with a 37% drop, while Brigade Enterprises and Sobha fell between 20% and 31%. Other names including Prestige Estates, Lodha Developers, Oberoi Realty, The Phoenix Mills, and Anant Raj also lost up to 16%. Raymond Realty has not been included in the comparison, as it was demerged from Raymond in May.

“Realty stocks have fallen as developers remain exposed to execution risks, cyclicality in demand, regulatory hurdles, and higher leverage, which make their earnings volatile. In a volatile market, investors prefer visibility of cash flows, which is why REITs have outperformed while pure-play developer stocks remain under pressure,” said Khushi Mistry, Research Analyst at Bonanza, summing up REITs’ outperformance over realty stocks.

Technically, REITs are trading above key moving averages, with the momentum indicator RSI also holding in bullish zones, Drumil Vithlani, Technical Research Analyst at Bonanza, said. In contrast, the realty index remains below EMA resistance, with RSI/ADX confirming a lack of momentum.

Sebi’s nod for equity reclassification to REITs came on September 12. The move paves the way for greater participation from mutual funds. The reclassification aligns with global best practices, considering the characteristics of REITs, which are more aligned with equity and relatively more liquid.

“Granting equity status to REITs is a game-changer. It improves their inclusion in mutual fund portfolios, benchmark indices, and passive investment flows. Liquidity in REIT units is likely to improve, valuations should become more comparable to equities, and retail participation may deepen. Overall, it helps institutionalize the asset class and could lead to greater capital formation in the realty sector,” Mistry said.

Mistry recommends REITs for investors seeking predictable income with relatively lower volatility. “They combine the features of fixed income (through regular distributions) and equity (capital appreciation),” she said, while cautioning about the risks associated with realty stocks.

Real estate stocks can offer outsized returns in cyclical upturns but require high risk appetite and timing skills, the Bonanza analyst added. Out of the four, she picks Embassy Office, Mindspace, and Brookfield India while leaving out Nexus. “They offer high-quality office portfolios with strong occupancy and steady rental escalations. Embassy remains the market leader with scale advantage, Mindspace has strong tenants in IT/ITES hubs, and Brookfield provides diversification with a global sponsor,” Mistry said.

On the broader realty outlook, Mistry remains positive, saying the sector is entering a more mature phase after multiple cycles of leverage, demand-supply imbalances, and regulatory tightening. Residential demand has revived in the past 2–3 years due to affordability, urbanization, and consolidation in favor of stronger developers, she said.

REITs have been gaining popularity as they offer stable income, and investors can allocate a portion of their investable funds to them, Kranthi Bathini, Director-Equity Strategy at WealthMills Securities, said. Realty stocks, meanwhile, are more suitable for aggressive investors as they carry execution risks among other challenges. He suggests buying Brookfield, Mindspace, and Nexus for the long term.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)

Frequently Asked Questions

What are REITs and how do they work?

REITs, or Real Estate Investment Trusts, are companies that own, operate, or finance income-generating real estate such as office buildings, shopping centers, apartments, hotels, and warehouses. They allow individuals to invest in large-scale real estate projects without taking on direct ownership. REITs pool money from investors and distribute the bulk of their taxable income to shareholders in the form of dividends.

Why have REITs outperformed realty stocks in the past year?

REITs have outperformed realty stocks due to their ability to generate stable income and the enhanced status they now enjoy after receiving equity status from Sebi. Realty stocks, on the other hand, have struggled with execution risks, cyclicality in demand, regulatory hurdles, and higher leverage, which make their earnings volatile.

What is the impact of Sebi's decision to grant equity status to REITs?

Sebi's decision to grant equity status to REITs is a game-changer. It improves their inclusion in mutual fund portfolios, benchmark indices, and passive investment flows. Liquidity in REIT units is likely to improve, valuations should become more comparable to equities, and retail participation may deepen. Overall, it helps institutionalize the asset class and could lead to greater capital formation in the realty sector.

Which REITs are recommended for investment?

Experts recommend Embassy Office, Mindspace, and Brookfield India REITs for investment. These REITs offer high-quality office portfolios with strong occupancy and steady rental escalations. Embassy remains the market leader with scale advantage, Mindspace has strong tenants in IT/ITES hubs, and Brookfield provides diversification with a global sponsor.

What is the broader outlook for the real estate sector?

The real estate sector is entering a more mature phase after multiple cycles of leverage, demand-supply imbalances, and regulatory tightening. Residential demand has revived in the past 2–3 years due to affordability, urbanization, and consolidation in favor of stronger developers. REITs are gaining popularity as they offer stable income, making them suitable for investors seeking predictable returns.