REITs vs bonds vs property: Where do they fit in an investor's portfolio?

REITs can generate income from property while trading like listed securities, placing them somewhere between two familiar investment worlds.

What exactly is an investor buying when money goes into a REIT?

REITs, bonds and direct property can all generate returns, but their income, liquidity, risks and exposure to market movements work very differently.

The obvious answer is real estate. Yet that only tells part of the story. A listed REIT owns income-producing property, pays distributions from the cash those assets generate and trades on an exchange. Its unit price can move every day, and it can borrow money. Its tenants can leave. Its rents can rise. And when interest rates change, both its financing bill and the relative appeal of its distributions can change with them.

That puts REITs in an unusual position when an investor is deciding between the predictability of fixed income and the familiarity of owning property directly. They borrow characteristics from both without behaving exactly like either.

India's interest-rate environment makes the comparison particularly relevant. The Reserve Bank of India currently lists the policy repo rate at 5.25% and bank term-deposit rates above one year broadly at 6.00-6.75%, while government securities of different maturities are yielding roughly 6.6-7.6%.

Those numbers provide a useful reference point, but not a ranking of where money should go.

Start with the income cheque

A fixed deposit tells an investor the contracted interest rate at the beginning. HDFC Bank, for example, was offering general customers with deposits below ₹3 crore rates ranging up to 6.50%, depending on tenure, from 19 August 2026. ICICI Bank's rate for general customers on deposits below ₹3 crore for periods from three years and one day to five years was 6.50% from 11 September. REIT income works differently.

There is another complication hidden inside the word “distribution”. Embassy's ₹6.31 payment comprised ₹0.37 of interest, ₹5.14 of debt repayment and ₹0.80 of dividend. A REIT distribution can therefore contain components with different tax treatment; it should not automatically be read as equivalent to interest from a bond or fixed deposit.

The trade-off is that REIT income has the possibility of changing as the property portfolio changes. Embassy reported contracted rental escalations of approximately 5% a year across its portfolio as of June 2026. Mindspace recorded a 10.7% re-leasing spread in Q1 FY2027. Neither guarantees that distributions or unit prices will rise by the same percentage, but both show where growth in property-level cash flows can enter the equation.

A conventional fixed-income instrument does not offer that same rental-growth mechanism. In return, it generally provides greater visibility over the cash flow promised to the investor.

Then interest rates enter from two directions

For a REIT, rates matter twice.

First comes the comparison with other income assets. If relatively low-risk bonds and deposits offer higher yields, investors may demand more from a REIT to compensate for property and market risk. Because yield and unit price move inversely when the distribution is unchanged, that adjustment can put pressure on REIT valuations.

The second effect happens inside the REIT itself. Property portfolios use debt, so refinancing at a higher interest rate can raise financing costs and reduce cash available elsewhere.

A Mindspace valuation report illustrates the connection. It noted an average borrowing cost of around 8.5% over the eight-year period considered for its valuation analysis. Following declines in interest rates, the report said the cost of new debt capital had fallen; for valuation of the completed assets, it used an 8.3% cost of debt. It also noted that some borrowings were locked in at fixed rates and therefore did not immediately move with prevailing rates.

This is why a change in the repo rate does not translate mechanically into an identical change in a REIT's borrowing cost or distribution. Debt maturity, fixed-versus-floating exposure, refinancing schedules and leverage all intervene.

Direct property bought with a home loan has its own version of the same problem: interest rates alter the cost of financing, while the asset itself remains illiquid.

A flat can return money without producing much rent

Direct residential property complicates comparisons because much of the return can come from price appreciation rather than rental income.

The latest National Housing Bank RESIDEX makes that visible. Its 50-city housing price index based on assessment prices rose 7.0% year on year in the April-June 2026 quarter. Bengaluru recorded a 21.5% increase, Chennai 10.8%, Ahmedabad 7.9%, Kolkata 6.9%, Mumbai 6.2%, Hyderabad 5.2% and Pune 3.7%. Across all 50 cities, however, the range stretched from a 24.4% increase in Faridabad to a 1.7% decline in Kalyan Dombivali.

That spread is more informative than the national average. There is no single “property return”. City, neighbourhood, property type, purchase price and timing can produce very different outcomes.

A homeowner or landlord also receives the economics of one particular asset. Rent, maintenance, vacancy, brokerage, taxes and transaction costs sit with the owner, and selling can take time.

A REIT turns that equation around. The investor owns units in a managed portfolio rather than one identifiable office floor or shopping centre. Units can be traded on the exchange, while leasing, maintenance and property management are handled by the REIT structure. The price paid for that liquidity is daily market volatility: the value on screen can fall even when the buildings underneath remain occupied and collecting rent.

Past returns reveal the mixed character

India's listed REIT history is still relatively short, which makes long-term comparisons with bonds and property difficult.

Even so, the early record shows why looking only at distribution yield misses part of the result. Avendus Wealth Management's Q1 FY2027 analysis calculated returns since listing using both changes in unit price and cumulative distributions. From their respective listing dates to 31 March 2026, it estimated total returns of 91% for Embassy Office Parks REIT, 102% for Mindspace Business Parks REIT, 52% for Brookfield India Real Estate Trust and 73% for Nexus Select Trust.

Those figures are historical, span different starting dates and should not be treated as expected returns. They do, however, demonstrate that a REIT investor's outcome comes from two places: distributions received and movement in the market value of the units.

Direct property has the same broad combination of income and capital value, but without a continuously quoted exchange price. Fixed income shifts the balance towards contractual cash flows and repayment terms, subject to the characteristics and credit risk of the instrument.

India is still the smaller experiment

The comparison becomes clearer when India is placed beside markets where listed property has had decades to develop. US equity REITs provide a useful long-history reference. As of 18 September 2026, the FTSE Nareit All Equity REITs Index had produced a year-to-date total return of 10.63% and carried a dividend yield of 3.83%. A few months of performance cannot establish a long-term advantage over bonds or direct property. What mature markets demonstrate instead is how listed real estate can occupy a distinct allocation alongside them.

India has only been building that record since Embassy became the country's first listed REIT in 2019. The market now extends beyond that first office portfolio, but its history still covers only a fraction of an economic or interest-rate cycle compared with established international REIT markets.

That limits what historical Indian data can prove. It also makes the underlying properties, debt structure, occupancy, rental growth and distribution record especially important when assessing individual trusts.

Three assets, three different jobs

Putting a REIT beside a bond and a property does not produce a clean winner because the investor is not choosing between three versions of the same asset.

A bond or fixed deposit is primarily an income and capital-preservation proposition, although the degree of certainty depends on the issuer, instrument and whether the bond is held to maturity or traded before then. Direct property combines possible rental income and capital appreciation with control over a physical asset, but also brings concentration, transaction costs and limited liquidity.

A REIT sits somewhere else. Its income begins with real buildings and leases, yet its units behave like listed securities. Rental escalations can support cash-flow growth. Borrowing can amplify the effect of interest-rate changes. Distributions can provide recurring income without being fixed. And the market price can add to or subtract from the return an investor eventually realises.

That makes interest rates important without making them the only number worth watching. A 6.5% fixed deposit, a REIT yielding around that neighbourhood and a residential property whose price rose 7% over a year are not interchangeable simply because the percentages appear close.

One is a contracted interest rate. One is an income yield attached to a traded security. The third is a change in the assessed value of an illiquid physical asset.

For an investor trying to decide where REITs belong, understanding those differences is more useful than arranging the three percentages from highest to lowest.

Note to the reader: This article has been produced on behalf of the brand by HT Brand Studio and does not have journalistic/editorial involvement of Hindustan Times.