SEBI's Game-Changing Move: Reclassifying REITs as Equity and Its Impact

SEBI's November 2025 circular reclassifies Real Estate Investment Trusts (REITs) as equity-related instruments from January 1, 2026. This significant change will have far-reaching implications for the Indian real estate investment market, opening doors for new capital to flow into property investments and making REITs more accessible to a broader range of investors.

The reclassification means that new REIT investments by mutual funds and SIFs will now count as equity exposure. This change will alter how portfolios are built and regulated, potentially leading to a more diversified and dynamic investment landscape. However, it's important to note that Infrastructure Investment Trusts (InvITs) will remain hybrid instruments, maintaining their current classification.

To protect existing investors, SEBI has introduced a grandfathering clause. Debt mutual funds holding REITs as of December 31, 2025, can continue to hold these assets without the immediate need to sell. Fund houses are allowed to exit these holdings gradually, depending on market conditions. This approach ensures a smooth transition and prevents sudden price swings or panic selling by investors.

The reclassification will also boost the visibility of REITs in the market. The Association of Mutual Funds in India (AMFI) will now classify REITs separately in its official lists, making it easier for investors to track and understand these instruments. Equity indices will include REITs only after July 1, 2026, providing markets with ample time to adjust and avoid sudden changes in index weights that could affect investors.

This reclassification is a game-changer for several reasons. It is expected to attract more capital inflows from equity funds, increasing liquidity and facilitating smoother price discovery. The psychological shift from viewing REITs as yield vehicles to growth assets will also pave the way for deeper, long-term participation from both institutional and retail investors.

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

Since 2019, Indian REITs have demonstrated a solid track record, delivering high occupancy rates and steady rental yields. They have also distributed over 90% of their income, primarily attracting institutional participation. SEBI's reclassification aims to broaden the investor base and enhance the overall appeal of REITs.

Despite the changes, certain aspects will remain unchanged. REIT income will continue to be taxed under existing rules, and InvITs will remain hybrid instruments. Fund houses are not required to make forced changes to their schemes but may need to issue addendums. This reclassification represents a structural evolution rather than a rushed overhaul, ensuring a stable and gradual transition for all stakeholders.

In summary, SEBI's decision to reclassify REITs as equity is a significant step that will transform the Indian real estate investment market. It promises to bring more capital, liquidity, and a broader investor base, ultimately enhancing the growth and stability of the sector.