Stock Market

RBI nod to bank investment in REITs is directionally win-win, now for the details

Shishir Asthana

Chillicious Research

Real estate stocks moved higher on Thursday on news that RBI will allow banks to invest in Real Estate Investment Trusts (REITs). The NSE Realty Index closed the day 0.80 percent higher.

Currently, banks are allowed to invest in equity-linked mutual funds, venture capital funds (VCFs) and equities to the extent of 20 percent of their NOF (net owned funds). It is proposed to allow banks to invest in REITs and InvITs within this umbrella limit. Detailed guidelines for these will be issued by end of May.

REIT is an investment vehicle that invests in rent-yielding completed real estate properties. REITs help unbundle the development and investment activities of the property development business. The instrument allows an investor to invest in portfolios of large-scale properties in the same way they buy stocks, by purchasing units of REITs.

The news is naturally positive for real estate developers, who are looking for alternate investment as direct lending by banks is drying up. The move however, will give a big boost to REITs.

It’s a win-win situation for the entire sector. Currently, developers, even after incurring huge capital expenditure especially in commercial real estate (CRE) are unable to generate returns immediately, unless they find a buyer for the property. Through REIT, the developers can exit from the completed asset, and focus alone on development activity, by selling the project to the REIT fund.

REIT attracts investment from local and global investors, who prefer a recurring, safe and moderate-yield income. Globally, the return on equity traded REIT has bettered that from leading stock markets indices over the past 10 years. The five-year returns for REITs ranged between 7 and 16 percent globally.

While REIT would help developers unlock value from their leased out assets and generate much needed capital, it would also provide a much needed entry and exit vehicle for the global institutional investors looking to invest in non-residential real estate assets in India.

According to a joint report by KPMG, Naredco, Hariani & Company and Knight Frank, titled ‘REIT-able Space in India: A Closer Reality’, close to USD 121 billion or 1.73 billion sq ft occupied commercial real estate across office, retail and warehouse segments could potentially benefit from the REIT opportunity.

In the case of office and retail, approximately 537 million sq ft and 75 million sq ft respectively is REIT-able area located in the top seven cities of Mumbai, NCR, Bengaluru, Chennai, Hyderabad, Kolkata and Pune. In the case of warehousing space, the all-India estimate is approximately 1,127 million sq ft.

In a falling interest rate scenario REITs can be good vehicles for banks to park their funds. As they are clubbed under equity, banks would prefer parking their funds under REIT as they are considered less risky.

The problem with real estate as an asset class is that it can be hard to liquidate. Indian REITs will help to split the bill on real estate investments. Developers divesting through REITs can get in and out of developments quickly. Investors can also make lower ticket investments in property through REITs.

However, the benefit for banks and real estate companies will not be immediate. There are still teething issues pending with the government for clearance of REITs, especially on account of stamp duties. Furthermore, since the guidelines say that REIT can invest 80 percent and above in revenue-generating and completed projects, many real estate players who are sitting on incomplete project will not get immediate relief. However, it may present a ray of opportunity.

For banks investing in REIT will give a much better return than parking their excess liquidity in government bonds. The risk-averse banker will be comfortable in investing in REITs rather than in the volatile equity market.

In short, RBI’s move has cleared the table for the success of REITs, provided the government and industry clear all the pending issues.