Reits seek changes in regulations to get easier access to capital

Real estate investment trusts (Reits) are in talks with regulatory bodies — the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) — to seek changes in regulations that will allow easier access to capital.

The Indian Reits Association (IRA) said it has approached the market regulator seeking to get classified as an ‘equity’ asset, which will open the path for their inclusion in equity indices and also make investment by mutual funds (MFs) easier.

The association is also in active discussions with the RBI to allow banks to lend to a Reit. At present, they borrow mostly through bond issuances or from non-banking financial companies. They said the opening up of the bank borrowing channel will help bring down the cost of borrowing.

“The top three on our agenda is to work closely with the RBI to get banks to lend to Reits, get clarity on equity classification and subsequent inclusion in indices to enhance liquidity. The third is investor education,” said Aravind Maiya, chief executive officer (CEO) of Embassy Reit and the chairperson of IRA.

At a panel organised by the IRA, executives said that the classification of Reits as equity will bring in more clarity for investors apart from opening new avenues for inflows through both active as well as passive MFs.

“Globally, Reits are generally classified as equity. There are quarterly or six-monthly payouts, but they are subject to the performance of the underlying assets. Also, there is capital appreciation. These are more of an equity-like feature and hence Reits should be classified as equity,” said Alok Aggarwal, managing director and CEO of Brookfield India Reit.

Currently, active MF schemes have some leeway to invest in Reits and infrastructure investment trusts. Several schemes have the provision to invest up to 10 per cent of the corpus in these asset classes.

The newly formed association said it aims to play a role similar to the Association of Mutual Funds in India to drive penetration and investor awareness. IRA also sees the MF investor base of 40 million as an addressable market. At present, there are around 200,000 Reit investors.

“Given the over 40 million pool of MF investors, there is no reason why the number of Reit investors cannot grow exponentially in the coming years,” said Dalip Sehgal, CEO of Nexus Select Trust.

Reits are at a nascent stage in India with the first listing happening in 2019. There are four listed Reits currently — Brookfield India, Embassy, Mindspace Business Parks, and Nexus Select Trust.

“The Indian Reit market has demonstrated noteworthy growth since the first Reit was listed in 2019 with Rs 1.3 trillion in gross assets under management, a market capitalisation of over Rs 85,000 crore, and a portfolio covering 115 million square feet of Grade A office and retail spaces nationwide,” the IRA said in a presentation.

They expect the Reit landscape, which is now limited to office space and retail, to expand to hotels, residential properties, data centres, and logistics.

DOING THE REIT THING

·         Equity classification will pave the way for the inclusion of Reits in equity indices, MFs

·         Inclusion will lead to more inflows and better liquidity on exchanges

·         MFs may look to launch Reit-based products

·         Investors will get the long-term capital gains advantage