RBI nod to direct bank lending to Reits may expedite asset growth

Industry executives note that REITs raise debt by issuing securities subscribed to by mutual funds and non-banking financial companies (NBFCs)

The Reserve Bank of India’s (RBI’s) proposal to allow banks to lend directly to Real Estate Investment Trusts (Reits) is expected to make it easier for the trusts to speed up retail and expand office assets by raising funds at lower rates, say industry executives.

 

Banks were earlier restricted from lending directly to the Reits, with the trusts having to borrow through their special purpose vehicles (SPVs) or rely on issuing bonds and raising equity in the capital markets. “With greater financial flexibility and access to long-term capital, Reits will be better positioned to support portfolio expansion and contribute to the formalisation and institutionalisation of India’s commercial real-estate sector,” the Indian Reit Association (IRA) said.

 

The association stated that direct access to bank lending provides Reits with a stable, long-term source of funding, expanding the avenues of fund raising for these instruments. RBI Governor Sanjay Malhotra added that the move is expected to be positive for both the banks and the real-estate sector.

 

Reits are investment vehicles that own or operate income-generating real estate, enabling investors to earn a share of the income produced without directly purchasing properties.

 

Industry executives noted that Reits raised debt by issuing securities subscribed to by mutual funds and NBFCs. But since these investors typically prefer instruments with a three-to-five-year tenure, securing a long-term funding remains a challenge. With bank lending now available, experts said that Reits might now have a diversified funding base, making them less vulnerable to capital market volatility.

 

“By having an array of bank lending options and the capital markets to fund their businesses and strategic objectives, Reits are poised to deliver greater growth and ultimately, better returns to unit holders,” said Embassy Reit chief executive officer (CEO) Amit Shetty.

 

Shishir Baijal, international partner, chairman and managing director, Knight Frank India, added that access to bank credit would serve as an additional funding avenue that diversifies the liability stack and enhances refinancing flexibility. Executives added that Reits might now easily refinance existing higher-cost debt with more stable bank loans, improving their distributable cash flows.

 

However, Anuj Puri, chairman at realty consultancy firm Anarock, added that the move needed to be accompanied by strong regulatory safeguards on exposure limits, and robust credit underwriting and monitoring practices.

 

India currently has five publicly listed Reits -- Brookfield India Real Estate Trust, Embassy Office Parks Reit, Knowledge Realty Trust, Mindspace Business Parks Reit and Nexus Select Trust. These hold approximately $27 billion of assets under management across office and retail segments, and have historically relied on capital market issuances and sponsor-backed financing.