REITs push for bank loan access, cite parity with InvITs but govt split on proposal

As per the current RBI regulations, REITS are not able to borrow directly from the banks because the present rules limit lending by banks only to the underlying project level entities (SPVs) and not at an entity like a REIT, which is at trust level. This constrains the ability of REITs to borrow, forcing them into less efficient or higher-cost sources of capital, thereby placing them on a footing that is not level with other modes similar to Infrastructure Investment Trusts (InvITs) in their space, people aware of the matter said.

At present, REITs, rely heavily on equity markets, bond issuances, and other debt instruments like commercial papers, which can be pricier and more susceptible to market fluctuations.

InvITs are similar to REITs but focus on infrastructure projects. They pool money from investors to invest in a portfolio of operational infrastructure assets, such as roads & highways, power transmission, renewable energy, telecom etc. RBI has permitted InvITs to borrow from banks since 2019, with some conditions tied to their assets value and underlying asset-quality.

Due to a strategic importance of infrastructure, InvITs have generally found a more open door with banks, as the central government actively prioritizes infrastructure development, and they are seen as vital vehicles for channelling long-term capital into such projects, sources said.

Experts say RBI’s scepticism on allowing REITs to borrow from banks stems from the fact that real estate, specifically commercial real estate, is viewed as more cyclical and volatile than infrastructure so banks would generally be more susceptible to defaults in a downturn.

"There is also a question of classification—since REITs are neither obviously equity nor debt, it's somewhat difficult to see where they fit in the traditional balance sheet framework. Second, since past real estate bubbles have led to banking crises, the central bank is wary of liberalizing bank exposure to the sector," said Siddharth Maurya, Founder, Vibhavangal Anukulakara – a financial services company based in Delhi.

"Another factor could be the lack of a clearly defined framework for bank lending to REITs. The RBI might require stringent safeguards, robust risk assessment mechanisms, and clear guidelines before fully opening the tap for direct bank loans to this segment," Santosh Meena, Head of Research at Swastika Investmart.

However, Meena says, globally, REITs commonly utilize bank loans, and aligning India's framework with these international practices could also attract more foreign investment.

Emerging segment

While the first REIT in India was launched in 2019, with Embassy Group and Blackstone-sponsored Embassy Office Parks REIT, the product has found favour with investors, particularly the institutional players, as a low-entry barrier method of owning and seeking returns from real estate.

Today, India has four listed REITs, all sponsored by major developers, as well as by major asset managers, currently or otherwise. Blackstone was part of both Embassy REIT as well as Mindspace Business Parks REIT, having exited both of its investments. K Raheja Corp is Mindspace REIT’s sponsor.

Brookfield India Real Estate Trust is sponsored by Canadian asset management major Brookfield, while Blackstone remains the sponsor of Nexus Select Trust, the only retail-led REIT. A fifth REIT, Knowledge Realty Trust, which is slated to be the largest one in the sector, counts Blackstone and Sattva Group as its sponsors.

Till May, the four listed REITs have gross assets under management worth over Rs 1.6 lakh crore, managing around 130 million square feet in office, retail, and hospitality space, according to data sourced from Indian REITs Association. In FY25, the four listed REITs distributed Rs 6,070 crore, higher by 13 percent year-on-year.