“The RBI’s notification allowing foreign institutional investors (FIIs) to invest in debt securities of REITs and InvITs will open up new fundraising avenues for REITs and InvITs, as REITs and InvITs have a constant requirement of patient capital for acquisition and portfolio scaling,” said Sigrid Zialcita, CEO of the Asia-Pacific Real Estate Association.
The Reserve Bank of India’s decision to enable foreign portfolio investors (FPIs) to buy debt securities issued by real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) is anticipated to supply the new asset class with much-needed patient capital and liquidity.
In the 2019 Union Budget, Finance Minister Nirmala Sitharaman enabled foreign institutional investors (FIIs) to participate in REITs and InvITs, however the process has yet to be completed. The Foreign Exchange Management (Debt Instrument) Regulations, 2021, have now been revised by the central bank to enable such investments.
“Institutional investors are among the major investors in business trust debt globally, since the credit and risk profile meets their liability management requirements. “Reits and InvITs have a constant requirement of patient capital for acquisition and to scale their portfolio up,” said Sigrid Zialcita, chief executive of the Asia-Pacific Real Estate Association. “RBI’s notification enabling FPIs to invest in debt securities of REITs and InvITs will open up the fundraising avenues as REITs and InvITs have a constant requirement of patient capital for acquisition and to scale their portfolio up.”
With effect from December 2017, the capital market regulator Instruments and Exchange Board of India modified the rules governing REITs and InvITs to allow them to issue listed debt securities.
However, these business trusts have been unable to get debt capital from FPIs owing to the RBI’s absence of enabling provisions in the foreign exchange laws. This is about to change.
“Global debt investors have long been the backbone of the REIT and infrastructure financing markets across the globe, and they’ve been eager to engage in India’s economic prospects.” “This proactive modification will extend and diversify the possible capital pool for REITs while also lowering the asset class’s cost of capital,” said Aravind Maiya, chief financial officer of Embassy Office Parks REIT.
The FPI approach is intended to assist REITs and InvITs in raising finance at competitive rates from overseas investors, as well as increase institutional involvement.
Due to leverage, this will also assist to improve risk-adjusted returns for business trust unit holders.
Embassy REIT expanded its investor base earlier this week with a Rs 4,600-crore debt offering at a cost of borrowing of roughly 6.5 percent.
For the last several years, banks have been avoiding lending to the real estate industry due to the risks involved. In compared to other individual assets, REITs, on the other hand, are typically favourably regarded.
Lenders at the REIT level may take security over receivables and benefit from cross-collateralization of numerous asset securities, giving them further security.
For the last several years, the government and Sebi have been working hard to make REITs and InvITs a success storey in India by bringing regulation up to international standards.
The capital market regulator has taken a number of proactive steps, including lowering the perpetual lock-in requirement for sponsors to match those in place for IPOs and allowing for a change in the sponsors of REITs and InvITs.
It has also lowered the amount of trading lots to improve liquidity and provided provisions for REITs to raise more capital, which will help them expand.
Source: The Economic Times