(Feb 6): The Reserve Bank of India plans to permit banks to lend directly to real estate investment trusts, or REITs, a move that could unlock fresh funding for property assets and boost the sector’s growth.
The central bank will soon permit such lending with “certain prudential safeguards”, governor Sanjay Malhotra said, while presenting the RBI’s monetary policy statement on Friday.
REITs, which own and operate income-generating office parks, malls and warehouses, are emerging as a key route for institutional capital to access India’s property market. REITs often take on assets from developers or acquire portfolios.
The central bank’s move will make it easier for REITs to raise capital, while lowering expenses, and speeding up asset expansion in the office and retail segments, said Anuj Puri, chairman of Anarock Group, a property consultancy, adding that this would improve the sector’s appeal to investors.
Analysts say lending to REITs is seen as risky as cash flows in the sector are very sensitive to occupancy, rental cycles and interest rates. Boom-bust cycles in real estate have put pressure on assets of banks in the past.
The RBI’s proposal also reflects a gradual opening up of bank credit to fund growth in the world’s fastest growing major economy. The central bank said last year it would allow banks to fund mergers and acquisitions and removed regulatory ceilings on lending against listed debt securities, while enhancing limits for lending against shares.
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REITs in India have been lobbying regulators for permission to access bank debt in order to cut their reliance on funding via the capital markets.
They currently account for only 20% of the country’s institutional real estate, significantly below other markets like the US, Singapore and Japan, according to a report published this week. REIT penetration could rise, driven by diversification into data centres, logistics parks and retail assets, the report said.
Still, allowing bank funding may come with risks. “The credit underwriting framework needs to be robustly developed for lending to this sector,” said Vivek Ramji Iyer, a partner at Grant Thornton Bharat in Mumbai. “The ability to understand lending risks in this sector is limited across banks in India.”
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