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The Indian REITs Association (IRA), formed last September under the guidance of SEBI and the Ministry of Finance, is actively seeking approval from the Reserve Bank of India (RBI) to enable borrowing from banks, a move aimed at expanding their funding base to support growth.
Aravind Maiya, CEO of Embassy Office Parks REIT and chairman of IRA, disclosed to The Hindu, that individual REITs have engaged in discussions with the central bank regarding this matter, but so far, there hasn't been a response from the RBI.
Currently, REITs have access to capital markets through bond and equity issuances, with commercial paper issuances being allowed since 2022. However, they are unable to directly borrow from banks, although banks are permitted to lend to Special Purpose Vehicles (SPVs) at the project level.
REITs are seeking parity with Infrastructure Investment Trusts (InvITs), which enjoy the ability to borrow from banks and invest in non-real estate infrastructure assets such as roads, highways, and power transmission.
Maiya emphasized the necessity of bank funding for REITs' growth, highlighting their asset-heavy nature as businesses that continuously acquire real estate assets to bolster their portfolios. He stressed the importance of a balanced funding mix comprising equity and debt, with bank loans playing a significant role, mirroring practices in other sectors.
While mutual funds and insurance companies are significant subscribers to the securities they issue, regulatory amendments in 2021 recognized REITs as borrowers, allowing lending to them under the Securities Contracts (Regulation) Act. Under SEBI REIT regulations, there exists a 49% leverage cap on a consolidated basis, including holding companies and SPVs, calculated based on the REIT's total assets.
The four listed REITs, including Embassy Parks, Mindspace Business Parks, Brookfield REIT, and Nexus Select Trust, collectively manage assets worth over INR 1.3 lakh crore, distributing over INR 15,500 crore in the last five years.
In summary, the Indian REITs Association's quest for RBI approval to borrow from banks underscores their strategic initiative to diversify funding sources and foster sustained growth within the real estate investment landscape.
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