SEBI's Big Move: Reclassifying REITs as Equity and Its Impact on Your Portfolio

SEBI's November 2025 circular reclassifies REITs (Real Estate Investment Trusts) as equity-related instruments from January 1, 2026. This move is expected to have a profound impact on the real estate investment landscape in India, making it more accessible and attractive to a broader range of investors.

The reclassification means that new REIT investments by mutual funds and SIFs (Special Investment Funds) will now be counted as equity exposure. This change alters how portfolios are built and regulated, potentially leading to a surge in capital inflows into the real estate sector.

One of the key provisions of the new rule is the grandfathering clause, which protects existing investors. Debt mutual funds holding REITs as of December 31, 2025, can continue to hold them without the immediate need to sell. SEBI has allowed fund houses to exit these holdings gradually, depending on market conditions. This approach helps prevent sudden price swings and panic selling, ensuring a smoother transition for all stakeholders.

Another significant benefit of the reclassification is the increased visibility of REITs in the market. AMFI (Association of Mutual Funds in India) will now classify REITs separately in its official lists, making them easier for investors to track and understand. Equity indices will include REITs only after July 1, 2026, giving the market ample time to adjust and avoid sudden changes in index weights that could affect investors.

The reclassification is a game-changer for several reasons. It is expected to attract more capital inflows from equity funds, increase liquidity, and facilitate smoother price discovery. Psychologically, REITs will be viewed more as growth assets rather than just yield vehicles, paving the way for deeper, long-term participation from institutional and retail investors.

Retail investors stand to gain the most from this change, as they will have easier, indirect access to real estate investments through equity mutual funds. Mutual funds and SIFs will also benefit from fewer allocation constraints, while developers will see stronger fundraising prospects. Office-heavy cities like Gurugram, Mumbai, and Bengaluru are likely to gain more attention as REIT portfolios grow.

Since their introduction in 2019, Indian REITs have delivered a solid track record, with high occupancy rates, steady rental yields, and the distribution of 90% or more of their income. Institutional participation has dominated the market so far, but SEBI aims to broaden the investor base with this reclassification.

Despite the significant changes, some aspects remain unchanged. The taxation of REIT income will continue under existing rules, and InvITs (Infrastructure Investment Trusts) will remain hybrid instruments. Fund houses will not be forced to make drastic changes to their schemes; instead, they will provide addendums to reflect the new classification. This is a structural evolution rather than a rushed overhaul, designed to foster long-term growth and stability in the real estate investment market.

In summary, SEBI's reclassification of REITs as equity is a strategic move that promises to enhance the liquidity and appeal of real estate investments. It is a step towards making the market more transparent and accessible, ultimately benefiting all stakeholders involved.