The Reserve Bank of India has recently made it possible for lenders to invest in REITs and InvITs, while capping exposure to 10% of the unit capital of the instruments, and subject to overall ceiling of 20% per cent of its net worth. In fact, investment by banks in asset classes such as equity-linked mutual funds, venture capital funds and equities and now, REITs and InvITs will have an umbrella cap – limited to 20% of their net owned funds.
Funds have been allowed to invest up to 5% of their net asset value in alternative securities – capped at 10% for any single fund.
What are REITs?:
REITs are companies that lease out real estate. This can include commercial (office and retail) as well as residential properties they own. The income from the rentals of the properties is shared among investors, who are allotted units of the specific REIT. The units can be bought and sold on nationwide stock exchanges.
What are InvITs?:
Infrastructure Investment Trusts (InvITs) are entities that invest directly in infrastructure by pooling money from many individual unit holders, and then apportion income generated (after expenditures) to the unit holders of the InvIT.
Very recently, REITs and InvITs have been allowed to issue debt securities. Prior to this provision, only equity-oriented REITs and InvITs existed in India. These offered only indicative and not fixed yields. The debt-oriented instruments will offer a fixed-return to investors.
REITs will also now be allowed to invest in an underlying holding company with 50% stake.
So, what are the likely benefits of these new frameworks on the part of the RBI for banks, funds, investors, REITs, INVITs and the real estate sector?
Investment in REITs and InvITs will allow banks to reduce equity exposure and generally spread out investments in more asset classes. Banks usually look at the long-term horizon. REITs and InvITs offer both long-term yield as well as liquidity.
REITs and InvITs can certainly be a good source of returns for funds, as long as proper due diligence is carried out.
The new allowances will open up real estate and infrastructure as an asset class for retail investors (individual) who will be able to make small ticket investments.
REITs and InvITs:
Seeking participation of ‘strategic investors’ like registered NBFC, scheduled commercial banks, and international multilateral financial institutions in the public issues of REITs (InvITs was previously allowed) will especially benefit these instruments. These investments will now be more lucrative for both institutional and retail investors.
Real Estate & Infrastructure Sector:
There will be an influx of liquidity for the real estate and infrastructure sectors, and cost of capital will likely decrease in the long-run. Access to capital from banks and funds will give a tremendous boost to both sectors. Builders will be able to develop and sell entire buildings to the investors. There will be more institutionalization of real estate in India.
In December 2016, Cushman & Wakefield Research projected the total value of ready REIT-eligible projects at USD 44-53 billion, across the top seven cities in India. In a few months from now, many companies are expected to list their REITs and InvITs on the exchange. Individual investors, banks, funds and pretty much everyone else in the country seems to be awaiting this, in eager anticipation.