Banks will be allowed to invest in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), attracting more institutional investors to such assets and expanding the investment scope of banks.
The Reserve Bank of India (RBI) on Thursday proposed to allow banks to invest in such investment trusts following a request from the markets regulator. The central bank will issue detailed guidelines by end May.
Banks, which are currently allowed to invest as much as 20% of their net-owned funds in equity-linked mutual funds, venture capital funds and stocks, may invest in these trusts within this limit.
This will benefit real estate developers firming up plans to launch these trusts.
“The RBI’s decision...is a huge positive. This step now has the potential to usher in a large number of REITs listing in India by offering a safe asset class to invest in and also provide competition to foreign institutions,” said Rajeev Talwar, chief executive of India’s largest real estate developer DLF Ltd. “For banks, it offers an additional important asset class for investing.”
For real estate developers, a pick up in REITs will free up capital that can be used to lower costs, he said.
Markets regulator Securities and Exchange Board of India (Sebi) has been easing rules to make REITs and InvITs more attractive to investors. In January, the markets regulator permitted mutual funds to invest in REITs and InvITs. Mutual funds are permitted to invest only up to 5% of their net asset value in units of a single issuer of such trusts. On 14 March, the insurance regulator also amended guidelines for insurers to invest in these asset classes.
“It is a crucial move because including it will bring in more institutional investors into these trusts, who are looking at relatively stable assets with steady but slightly lower returns. REITs may not be as lucrative for retail investors which is why it is important that owners find more number of institutional investors to participate,” said Abhishek Goenka, partner, PwC in India.
REITs are listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors. InvITs are trusts that manage income-generating infrastructure assets, typically offering investors regular yield and a liquid method of investing in infrastructure projects.
India’s REIT market is just about opening up with a number of developer-investors partners acquiring and consolidating rental assets and firming up plans.
DLF, which is in the last leg of selling a 40% stake in its rental portfolio to Singapore sovereign fund GIC Pte, has said it will list its office and retail properties in the form of REIT.
Global private equity firm Blackstone Group Lp, the largest owner of office real estate in the country, may list two separate REITs for its office assets with developer partners. One of them is with Bengaluru-based Embassy Property Developments Pvt. Ltd, which is valued at around Rs22,000 crore with more than 22 million sq. ft of space.
“While this will increase the number of institutional investors like banks coming in, we would also like to engage with retail investors and assure them good returns on the basis of rent income and appreciation,” said Embassy chairman Jitu Virwani. Embassy filed an application seeking approval for its REIT offering from Sebi in October and is expecting a go-ahead soon.
Other companies acquiring and consolidating their office assets and moving towards a REIT structure are RMZ Corp. and K. Raheja Corp.
The Competition Commission of India (CCI) in March approved Blackstone’s plan to acquire a stake in K. Raheja Corp’s commercial office portfolio.
IRB Infrastructure Developers Ltd is planning to launch India’s first InvIT in April, aiming to raise as much as Rs4,300 crore, a 17 March Mint report said.