The Reserve Bank of India on Friday proposed that banks be allowed to directly lend to real estate investment trusts (REITs) with certain prudential safeguards to deepen the financing pool for the real estate sector.
Currently, REITs raise funds through bonds which are subscribed by mutual funds, NBFCs and others. Since these investments are mostly short-term (three-five years), long-term funding was a challenge for REITs. With RBI’s move on Friday, that hurdle will be gone, senior REIT executives said. REITs could also refinance their short-term debt with bank debt, they said.
“This policy (of allowing banks to lend directly to REITs) will help expand access to longer-term, competitive bank finance, which will support healthier balance sheets and stable growth by reducing the need for frequent refinancing,” said Amit Shetty, chief executive at Embassy Office Parks REIT.
By having an array of bank lending options and the capital markets to fund businesses and strategic objectives, REITs are poised to deliver greater growth, and, ultimately, better returns to unitholders, Shetty said.
Ending the Refinancing Trap
“It will significantly improve credit flow, enhance financial stability, and enable long-term funding at the REIT level, reducing earlier dependence on special purpose vehicles (SPVs). This move widens our financing toolkit, supports better liquidity in the secondary market, and allows banks to offer long-tenure products aligned with the REIT structure,” said Ramesh Nair, CEO and MD, Mindspace Business Parks REIT .
At present, there are five listed REITs in India – Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, Nexus Select Trust, and Knowledge Realty Trust.
Anshuman Magazine, chairman and CEO – India, South-East Asia, Middle East & Africa, CBRE, said the RBI move is likely to be a major boost to these instruments and make it easier for trusts to raise funds at relatively cheaper rates. “Banks were generally restricted from lending directly to the REITs and they had to borrow through their SPVs or rely on issuing bonds and raising equity in the capital markets.”
According to experts, REITs raise funds through commercial papers at a rate of over 6.5 % and via non-convertible debentures (NCDs) at 7-8 %. REITs can borrow at below 7.5% if they go for lease rental discounting of their rent receivables, they said.
Improved Yields for Unitholders
Magazine said with bank lending now available, REITs may have a diversified funding base, making them less vulnerable to capital market volatility. “Moreover, they may now easily refinance existing higher-cost debt with more stable bank loans, improving their distributable cash flows.”
Vijay Agrawal, MD and sector lead infrastructure at Equirus Capital, said the RBI move indicates regulatory comfort with REITs as stable, cash-flow-backed entities, rather than speculative real estate exposures.
Besides improving access to bank credit , it should enhance refinancing flexibility and support incremental acquisitions, thereby aiding portfolio growth and asset recycling, he said .
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 REITs Association said.