RBI's allows banks to lend to REITs, experts say will bring down cost of capital

The RBI has allowed banks to lend directly to REITs

The Reserve Bank of India's new rules to allow banks to lend directly to real estate investment trusts will help lower the cost of capital for REITs, which earn and distribute income from commercial assets such as offices, malls, and hotels. The measure will also help them have a longer runway of capital for growth and acquisitions.

"We commend RBI’s landmark move to allow banks to lend directly to REITs at the trust level. This policy step will enhance access to long-term, stable financing for REITs, complementing traditional capital market funding and broadening the financing ecosystem for income-producing real estate," Embassy Office Parks REIT chief executive officer Amit Shetty.

The RBI’s move is expected to lower the cost of capital for REITs, as bank funding is cheaper and longer-tenor compared to bond or NBFC financing, Equirus Capital managing director and sector lead-infrastructure Vijay Agarwal said.

Improved access to bank credit should enhance refinancing flexibility and support incremental acquisitions, thereby aiding portfolio growth and asset recycling, he said.

Banks were not allowed to lend to REITs, either at the investment managers' level or at the level of their numerous special project vehicles (SPVs). Instead, REITs generally borrowed through capital markets, largely using bonds.

Multilateral institutions such as the World Bank Group as well as Indian non-banking financial companies have participated in such bond purchases, with REITs also starting to issue long-term sustainability-linked bonds.

Others described the RBI’s move — coupled with SEBI’s decision to treat mutual fund investments in REITs as equity — as a dual vote of confidence in the sector’s maturity.

Indian REITs, with approximately $ 27 billion of assets across office and retail segments, have relied on capital market issuances and sponsor-backed financing, and access to bank credit will serve as an additional funding avenue that diversifies the liability stack and enhances refinancing flexibility, Knight Frank India chairman and managing director Shishir Baijal said.

“The move reinforces regulatory confidence in listed real estate vehicles and should strengthen liquidity and depth in India’s real estate investment market," he said.

India has five listed REITs — Embassy Office Parks, Mindspace Business Parks, Brookfield India Real Estate Trust, Nexus Select Trust, and Knowledge Realty Trust.

These backed by large developers and private equity funds such as Embassy Group, K Raheja Corp, Sattva Group, Blackstone, and Brookfield Asset Management.