Policy Update
Sudeepti Joshi
Background
Real Estate Investment Trusts (REITs) allow investors to participate in income-generating real estate without directly purchasing or managing properties. They pool capital and invest in assets such as office buildings and retail properties. Investors hold units in the trust and may receive distributions from the income generated by its underlying assets.
SEBI notified the SEBI (Real Estate Investment Trusts) Regulations, 2014, on September 26, 2014. The framework created a regulated route for channelling investment into real estate through capital markets.
Despite the development of this framework, the listed REIT market remained relatively small. SEBI reported four listed REITs as of May 31, 2025, compared with 22 listed Infrastructure Investment Trusts (InvITs). The combined asset value of the two categories was approximately ₹8 lakh crore as of March 31, 2025 (Securities and Exchange Board of India [SEBI], 2025a).
A major regulatory change followed in 2025, when SEBI decided to reclassify REITs as equity-related instruments for mutual fund investment purposes. The change took effect on January 1, 2026. InvITs, in contrast, continue to be classified as hybrid instruments for these purposes (SEBI, 2025b).
Functioning
REITs operate through a trust structure that holds interests in real estate assets, directly or through special purpose vehicles and holding companies. SEBI’s framework governs asset composition, valuation, disclosures, distributions and governance.
REITs are required to distribute at least 90% of net distributable cash flows, subject to the applicable regulations. This does not mean that investors are guaranteed a fixed return. Distributions depend on available cash flows, which can be affected by rental income, occupancy, borrowing costs and operating expenses.
Before the 2025 reform, SEBI classified REITs and InvITs as hybrid instruments for mutual fund investment purposes. The classification had been established following a Board decision in January 2017, which recognised their equity-like features but also raised concerns about concentration and liquidity risks (SEBI, 2025a).
On November 28, 2025, SEBI issued a circular implementing the reclassification of REITs as equity-related instruments with effect from January 1, 2026. Existing REIT holdings in debt mutual fund schemes and Specialised Investment Fund (SIF) strategies as of December 31, 2025, were grandfathered. Asset management companies were encouraged to consider divesting these holdings in light of market conditions, liquidity and investor interests (SEBI, 2025b).
The change affects how REIT investments are treated within mutual fund and SIF asset allocations. It does not remove the risks associated with real estate or guarantee an increase in investment flows.
Performance
SEBI’s September 2025 Board Memorandum reported the following figures for the four listed REITs as of March 31, 2025.
The combined full-float market capitalisation of the four REITs was ₹94,807 crore. Trading activity, however, differed considerably. Brookfield REIT recorded an average daily trading value of ₹100 crore, compared with ₹7 crore for Mindspace REIT.
These figures show why market size and liquidity need to be assessed separately. Market capitalisation measures the value of the relevant units, while trading value indicates the level of transactions taking place. A large market does not automatically mean that investors can buy or sell units easily at any time.
Mutual fund holdings provide another indicator of participation. As of March 31, 2025, mutual funds held ₹14,410 crore in REITs, compared with ₹5,409 crore in InvITs. SEBI noted that investments in both categories represented a small proportion of the mutual fund industry’s overall assets under management of approximately ₹66 lakh crore (SEBI, 2025a).
SEBI’s reclassification was intended to facilitate greater participation by mutual funds and SIFs. It also allows REITs to be considered for inclusion in equity indices, subject to the relevant eligibility criteria. The regulator expected the change to improve liquidity and bring the treatment of REITs closer to international practice.
These were the objectives of the reform, not guaranteed outcomes. The March 2025 figures predate implementation and cannot establish whether the reclassification has increased investment flows since January 2026.
Emerging Issues
Classification does not remove investment risk. REITs remain exposed to changes in property demand, rental income, occupancy, interest rates and financing costs. Their equity-related classification changes their regulatory treatment for mutual fund investments, not the nature of the underlying assets.
Higher participation is possible, but not guaranteed. The new classification gives mutual funds greater flexibility to consider REITs within equity-related allocations. Actual investment decisions will still depend on fund mandates, valuations, liquidity and risk assessments.
Liquidity varies across trusts. The March 2025 data show considerable differences in trading activity. Greater institutional participation may improve market depth, but the benefits may not be distributed equally across all REITs.
The treatment of existing holdings needs monitoring. Grandfathering existing holdings avoids forcing immediate sales from debt schemes and SIF strategies. However, it also means the transition may differ across portfolios.
Finally, REITs and InvITs should not automatically be treated as identical instruments. REITs are primarily exposed to real estate assets, while InvITs may hold infrastructure assets with very different cash-flow and risk characteristics. SEBI’s decision to reclassify REITs while retaining the hybrid classification for InvITs reflects this distinction (SEBI, 2025a, 2025b).
Way Forward
SEBI’s recent measures concerning REITs focus on facilitating institutional investment and reviewing the regulatory requirements governing their operations. The distinction between notified changes and proposals under consultation is important when assessing the direction of policy.
Reclassification for mutual fund investment
Through its circular dated November 28, 2025, SEBI notified that, from January 1, 2026, investments by mutual funds and Specialised Investment Funds (SIFs) in REITs would be treated as investments in equity-related instruments. InvITs continue to be classified as hybrid instruments for this purpose. The circular also provides for grandfathering existing REIT investments held by debt schemes and SIF strategies as of December 31, 2025, while encouraging asset managers to consider divestment in light of market conditions, liquidity and investor interests.
Review of investment in liquid mutual funds
SEBI has considered expanding the range of liquid mutual fund schemes in which REITs may invest. The proposal is intended to give REITs greater flexibility in managing temporary surplus funds and reduce concentration arising from a limited pool of eligible schemes. Its final status depends on subsequent regulatory action.
Simplification of operational requirements
SEBI has continued reviewing ease-of-doing-business measures applicable to REITs and InvITs. A further consultation paper published on August 6, 2026, indicates that this review remains active. The specific measures should be described as proposals unless their adoption is confirmed through a final SEBI notification or circular.
The reclassification of REITs is an implemented regulatory change, whereas the broader ease-of-doing-business measures remain subject to the status of the relevant consultations. Together, these developments show SEBI’s approach to facilitating participation by institutional investors while continuing to review the regulatory framework for listed real-estate investment products.
References
Securities and Exchange Board of India. (2025, November 28). Reclassification of Real Estate Investment Trusts (REITs) as equity related instruments for facilitating enhanced participation by Mutual Funds and Specialized Investment Funds (SIFs). https://www.sebi.gov.in/legal/circulars/nov-2025/reclassification-of-real-estate-investment-trusts-reits-as-equity-related-instruments-for-facilitating-enhanced-participation-by-mutual-funds-and-specialized-investment-funds-sifs-_98031.html
Securities and Exchange Board of India. (2026, February 5). Consultation paper on measures towards ease of doing business for REITs and InvITs. https://www.sebi.gov.in/web/?file=https%3A%2F%2Fwww.sebi.gov.in%2Fsebi_data%2Fattachdocs%2Ffeb-2026%2F1770291447622.pdf
Securities and Exchange Board of India. (2026, August 6). Consultation paper on measures towards ease of doing business for REIT and InvITs. https://www.sebi.gov.in/reports-and-statistics/reports/aug-2026/consultation-paper-on-measures-towards-ease-of-doing-business-for-reit-and-invits_103401.html
About the Contributor
Sudeepti Joshi is a second-year B.A. (Hons.) Economics student at Dayal Singh College, University of Delhi. Her academic and research interests include economics, public policy, development and institutional finance.
Acknowledgements
The author extends sincere gratitude to Khushi, Siddhant Koul and the IMPRI team for their valuable guidance and support.
Disclaimer
All views expressed in the article belong solely to the author and not necessarily to the organization.
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