The Reserve Bank of India (RBI) has allowed banks to lend directly to real estate investment trusts (REITs), subject to prudential safeguards.

This lending facility was already available to infrastructure investment trusts (InvITs), which hold assets like roads, highways and transmission lines.

"Upon review and considering the presence of strong regulatory and governance framework for listed REITs, it is proposed to permit commercial banks to extend finance to REITs, subject to appropriate prudential safeguards," the RBI said in a statement.

"The existing guidelines in respect of lending to InvITs are also being harmonised for parity with prudential safeguards proposed for lending to REITs," it added. 

The RBI’s move will make it easier for REITs to raise capital, reduce their borrowing costs and trigger faster asset expansion in the office and retail segments.

Interest rates to REITs could come lower at 7% to 8% compared to the 10% to 12% rates for the real estate sector currently.

Said Embassy REIT chief executive officer Amit Shetty, “This policy step will enhance access to long-term, stable financing for REITs, complementing traditional capital market funding and broadening the financing ecosystem for income-producing real estate. It will help expand access to longer-term, competitive bank finance, which will support healthier balance sheets and stable growth by reducing the need for frequent refinancing. By having an array of bank lending options and the capital markets to fund their businesses and strategic objectives, REITs are poised to deliver greater growth and, ultimately, better returns to unitholders." 

India’s five publicly listed REITs are Brookfield India Real Estate Trust, Embassy Office Parks REIT, Knowledge Realty Trust, Mindspace Business Parks REIT and Nexus Select Trust. 

By allowing banks to lend to the REITs, it opens up a new funding source for the real estate sector. Banks are currently allowed to fund only real estate projects but not land acquisitions.

"REITs today raise debt funds through issuance of debt securities which are subscribed by mutual funds, NBFCs, etc. Since these investors prefer instruments with 3-5 years tenor, long-term funding remains a challenge. With RBI allowing banks to lend to REITs, these vehicles will be able to access long term funding," the Indian REITs Association said in a statement.

“With greater financial flexibility and access to long-term capital, REITs will be better positioned to support portfolio expansion and contribute to the formalisation and institutionalisation of India’s commercial real estate sector,” it added.