SEBI’s nod for REITs, InvITs’ commercial papers to improve liquidity, lower cost

The Securities & Exchange Board of India’s (SEBI) decision to allow Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to raise funds through the issue of commercial papers is expected to help improve liquidity for the new asset class and also lower their cost of capital.

According to the Reserve Bank of India’s directions on commercial papers last month, InvITs and REITs with a net worth of at least Rs 100 crore are eligible to issue commercial papers. The issuance of these listed commercial papers is expected to be within the overall debt limit permitted under the REITs and InvITs rules.

Commercial Papers are short-term debt instruments issued by companies to raise funds, usually for up to one year.

“SEBI’s move to allow REITs to issue commercial papers provides an additional avenue of financing through short-term debt instruments at comparatively lower costs and shorter timelines. This aids in bringing down the cost of capital for AAA-rated REITs,” said Vinod Rohira, CEO, Mindspace Business Parks REIT.

Last year, the central bank allowed foreign portfolio investors (FPIs) to invest in debt securities issued by REITs and InvITs and the capital market regulator’s latest decision will open one more avenue of financing and help these business trusts secure short-to-medium term funds at a lower cost. Both the decisions cumulatively will also help in pushing business trust unit holders’ risk-adjusted returns higher due to leveraging.

“This decision will allow REITs and InVITS to raise short-term debts and bridge their capital requirements. The decision is demonstrative of the government’s acknowledgement and encouragement of this investment asset class and will help the listed REITs and InVITs perform better in the future. This may also add to the attraction for other commercial portfolio owners to list for REITs,” said Shishir Baijal, CMD, Knight Frank India.

The government and Sebi have been making efforts for the last few years to make REITs and InvITs a success story in India by getting regulations at par with global standards.

According to Rohira, REITs, a relatively new investment vehicle in the Indian markets, have seen a positive response from both unitholders and potential investors and this fortifies confidence in the instrument and bodes well for the REIT story that is currently unfolding in India.

The capital market regulator has proactively undertaken many initiatives, including a reduction in the perpetual lock-in requirement for the sponsor to align it with those applicable for IPOs and flexibility for change in REITs and InvITs’ sponsors.

It has also reduced the size of trading lots to enhance liquidity and made provisions for enabling further capital raising in REITs, which will prompt growth.

“Global REITs have long used commercial paper as a short-term financing option. The introduction of commercial paper in India further validates the creditworthiness of REITs as they continue to transform the commercial real estate sector in the country. Additionally, this initiative will further reduce the cost of capital for this asset class and will also deepen the available capital pools, which already include banks, FPIs and insurers,” said Vikaash Khdloya, CEO, Embassy REIT.

REITs and InvITs are relatively new investment instruments in the Indian context but extremely popular in global markets, given their stable returns to investors through rental income from a portfolio of stabilized commercial properties.

While a REIT comprises a portfolio of commercial real assets, a major portion of which is already leased out, InvITs comprise a portfolio of infrastructure assets such as highways, and power-transmission assets.

The country’s maiden REIT listing took place in April 2019 with Embassy Office Parks REIT. Following this, two more REITs–K Raheja Group’s Mindspace Business Parks REIT and Brookfield India Real Estate Trust REIT–were listed on the bourses in 2020.

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