While the Reserve Bank of India’s (RBI) move to allow banks to lend directly REITs (real estate investment trusts) will widen their borrowing options, it is unlikely to reduce cost of debt in a big way, as the difference of rates between bonds/commercial papers and bank credit is merely 10-15 basis points (bps).
“AAA rated companies anyways get good rates. Even after banks get the nod, difference (10-15 bps) in rates won’t be significant,” said a senior executive at a company familiar with REIT fundraising.
Developers look to fix funding costs
He said as the interest rates cycle might reverse in the couple of quarters, it makes sense to lock in bonds and commercial papers at 6.75% to 7.05% for three-four years. Typically, developers get rates of 7-7.25% for lease rental discounting of their rent receivables.
Vishal Srivastava , managing director at Anarock Capital, said commercial papers and bonds offer cheaper rates. “Bank debt can’t compete with bonds and commercial papers which charge 6.75% to 6.8%. Why would you borrow higher than that from banks.”
Ease in fundraising
A senior executive at a REIT said though the RBI move won’t bring down their financing costs significantly, it will help get working capital financing and overdraft facility at better rates from banks. “Banks can do overdrafts much cheaper. We had an expensive O/D line from an NBFC which we will shift to a bank now.” Though it (direct bank lending ) is not a major move like Sebi classifying REITs as equity, it would help the segment, he said.
Another senior executive at a REIT said the RBI move would reduce heavy dependence on capital markets (listed NCDs). “While mutual funds and insurance companies normally subscribe to bonds for three-four years, banks can subscribe for 10 years, giving the benefit of long-term loans for REITs.”
When banks bid for NCDs with MFs and insurance firms, the bidding will be robust and REITs will get the lowest rate, he said. Earlier, a particular SPV in a REIT could raise funds from banks. Now, the trust can borrow funds from banks while giving cross collaterals from multiple SPVs.
The chief financial officer of a real estate company said more than cost advantage, the RBI move will make raising funds easier. “Banks are easily accessible… CPs/bonds are difficult to raise. Repayment and rescheduling of bonds/CPs have different conditions to be met.”
The operational REIT market is currently valued at ₹2.3 lakh crore, comprising four listed office REITs and one retail REIT, according to a JLL report. The report noted that high-quality, well-performing office assets alone represent an additional opportunity worth ₹5.9 lakh crore, indicating a potential four-fold growth for the office REIT segment.
There are five listed REITs – Embassy Office Parks, Mindspace Business Parks, Brookfield India, Knowledge Realty Trust and Nexus Select Trust.