For many Indians, real estate has always been a favoured asset class. But large capital outlays and crippling illiquidity have kept the masses from venturing beyond residential property. For the past few years, Real Estate Investment Trusts (REITs) have offered a more democratised route to invest in all manner of real estate assets. But a few shortcomings have prevented investors from fully embracing this alternative. This could be set to change, with the entry of REIT-focused mutual funds. Edelweiss Mutual Fund is set to launch the first such product—an index fund tracking the Nifty REITs & Realty Index. (NFO opens on 5 August). Other asset management companies (AMCs) are also exploring similar offerings.What REITs solvedThe introduction of the REIT framework in 2014 marked the most consequential structural shift in India’s commercial real estate. Listed REITs allow investors to own incomeproducing commercial spaces like tech parks, retail malls, warehouses and data centres for a nominal sum. A REIT pools these assets together in a professionally run setup and fetches regular cash flows through rental yields, while also offering capital appreciation. For investors, REITs offer a structured way to invest in real estate assets. Rajani Tandale, Senior Vice President (Mutual Funds) undefined a REIT unit costs a few hundred rupees.”So far, six REITs with combined gross asset value of Rs.3.1 trillion are listed. These include Embassy, Brookfield, Nexus, Mindspace, Knowledge Realty and Bagmane. A tight regulatory framework and institutional-grade discipline have ensured tenant quality across REITs remains impeccable. At least 80% of REIT assets, by value, must be completed and rent-generating property—not land or projects under construction.In recent years, strong office and retail space absorption have provided healthy earnings visibility. All listed REITs boast occupancy levels in excess of 90%. “Further, their contractual rental escalations and rising replacement costs (new tenants pay higher) provide a natural hedge against inflation,” asserts Shravan Sreenivasula, Head - Investment Solutions, Avendus Wealth Management.Before you continue readingHow financially free are you?Most people overestimate their financial freedom. Discover your Financial Freedom score through a quick surveyFor investors seeking income with growth potential, REITs offer steady cash flows. They are required to distribute at least 90% of their income as cash payouts or dividends to unitholders. This offers a steady stream of income. In recent years, payouts have averaged 7-9% (including capital returned). The listed REITs have so far distributed over Rs.31,700 crore as payouts. Initially, returns from REITs mainly came through distributions. But in recent years, listed REITs have seen healthy capital appreciation, led by a fall in interest rates. When interest rates fall, REIT prices tend to rise, and vice versa. Capital gains in listed REITs have averaged around 8%.Healthy payouts, decent gainsREITs initially earned by way of distributions, but have seen sizeable capital gains in recent years.