India's Real Estate Investment Trusts (REITs) are experiencing a surge in investor interest following the Securities and Exchange Board of India's (SEBI) reclassification of REITs as equity instruments. This landmark decision is expected to boost market potential by attracting greater participation from mutual funds, enhancing liquidity, and aligning Indian REITs with global standards.

SEBI's Reclassification: A Game Changer

Previously, mutual funds faced investment restrictions in REITs due to their classification as hybrid instruments. SEBI's reclassification removes the 10% investment restriction for mutual funds, paving the way for increased allocations to REITs. This move recognizes the equity-like characteristics of REITs in terms of structure, transparency, and liquidity. The reclassification is anticipated to have several positive outcomes:

• Increased Global Capital Inflows: The change is expected to attract more Foreign Portfolio Investors (FPIs), bringing in additional global capital to the Indian REIT market.
• Enhanced Participation: Fund houses and insurance companies are likely to increase their involvement in REITs, broadening the investor base.
• Improved Liquidity and Price Discovery: The reclassification is anticipated to boost liquidity in the REIT market and enhance price discovery mechanisms.
• Alignment with Global Standards: This move aligns Indian REITs with international market practices, making them more attractive to global investors.
• Potential Index Inclusion: The reclassification opens the door for REITs to be considered for inclusion in equity indices, which could attract passive fund flows, boosting liquidity and visibility for the sector.

Market Performance and Investor Sentiment

Indian REITs have already been outperforming realty stocks, delivering strong returns due to their stable income generation. As of September 2025, Mindspace Business Parks REIT has delivered 29% returns over the past year, followed by Brookfield India Real Estate Trust with 17%. In contrast, the Nifty Realty index slipped 20% in the past year. The reclassification is further boosting REIT values and attracting increased investor interest, particularly from High Net Worth Individuals (HNIs) and institutions. This shift is occurring partly at the expense of listed property developers, as REITs offer stability and lower volatility. Following the announcement, all five listed REITs registered gains.

REITs as an Investment Option

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.

For investors looking for regular income, REITs are a good option, especially for retirees seeking diversification. Indian REITs offer attractive distribution yields of around 6% to 7%, surpassing yields in mature markets such as the US and Singapore.

Growth Potential and Future Outlook

The Indian REIT market has grown steadily since its initial listing in 2019. As of August 2025, the market capitalization of Indian REITs stood at approximately $18 billion and is projected to cross $25 billion by 2030. The market for REIT-ready office supply is poised for exponential growth, with the potential to expand the office REIT market size by a remarkable 6.0–6.5 times. The REIT penetration in the office market could hit 25-30% by 2030, up from current levels of 16%.

While office REITs currently dominate the Indian REIT landscape, diversification into other asset classes such as retail, logistics, data centers, and housing is expected to drive future growth.

Considerations for Retail Investors

While the reclassification mainly benefits mutual fund schemes by allowing higher allocations, it doesn't materially change the core trade-offs investors face between direct ownership and investing via mutual funds.

The biggest advantage of investing in REITs directly for small investors is the tax-free dividend income. However, those seeking diversification across multiple REITs and lower entry barriers through systematic investment plans (SIPs) may find mutual funds more suitable. Liquidity and concentration risks are key concerns for direct REIT investors.

Conclusion

SEBI's reclassification of REITs as equity represents a transformative step for the Indian real estate investment market. By removing investment restrictions and potentially increasing liquidity, this move is set to attract more diverse investors and align the Indian REIT market more closely with global standards. As the market evolves, it will be interesting to observe how these changes impact the growth and performance of REITs in India. The combination of regulatory confidence, market depth, and diversification ensures that REITs will play a defining role in shaping the future of Indian real estate.