Realty stocks surged on Thursday after the Reserve Bank of India (RBI) allowed domestic lenders to invest in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). Despite volatility in the broader market, the BSE Realty, a gauge for the performance of real estate stocks, gained two per cent, the most among sectoral indices.
Shares of DLF, which is planning to launch a REIT soon, surged 4.5 per cent. Shares of Unitech and Prestige went up 3.25 per cent and 1.92 per cent, respectively.
RBI has proposed that banks could invest in REITs and InvITs within the umbrella limit provided to them for investing in equity-linked mutual funds, equities and venture capital funds, which is 20 per cent of net owned funds (NOF). It is expected to come up with detailed guidelines within two months.
The development comes after markets regulator Securities and Exchange Board of India (Sebi) has been working extensively to develop these products. It has been in talks with other financial regulators, including the Insurance Regulatory and Development Authority of India (Irdai) and RBI, to bring more institutional participation for these products. While Sebi has already allowed mutual funds to invest in REITs and InvITs, Irdai recently gave a go-ahead for insurance companies.
“It is a positive step by RBI to allow banks to invest in safe asset classes like REITs and InvITs. Until now, people thought only foreign investors would be interested in such products. Now domestic institutions will compete for subscriptions,” said Rajeev Talwar, chief executive officer, DLF.
Experts say RBI’s go-ahead has moved REITs one step closer to becoming a reality. The fund-raising instrument could help in the revival of beleaguered real estate and infrastructure companies which are facing a liquidity crunch, due to which completion of projects is being delayed, they said.
“Globally, REITs and InvITs are popular financial instruments, especially among institutional investors, as they provide steady returns and are comparatively less risky. This helps the institutions to balance their portfolios with instruments that provide stable income,” said Neeraj Sharma, director at Grant Thornton Advisory.
REITs and InvITs are like mutual funds which could be listed on the stock exchanges. One key difference is the underlying security. In case of REITs, this is a revenue-yielding property; while for InvITs it is an infrastructure project.
Market participants say products allowing domestic institutions to participate in REITs and InvITs would boost the confidence of retail investors.
“Participation of banks would be seen by retail investors as a safe due-diligence for investment in such trusts. These products would provide retail investors an opportunity to earn regular returns, as in the case with corporate bonds and fixed deposits, with the added possibility of an upside on equity,” said Kamlesh Shroff, spokesperson of BSE Brokers Forum.
REITs and InvITs were initially proposed in 2008 but no single company has successfully launched a REIT or InvIT, due to several regulatory and tax-related issues. In the Union Budget for FY17, the government had provided REITs and InvITs exemption from withholding tax. Later, the markets regulator had tweaked several norms for both, including allowing multiple sponsors to invest jointly. It had also allowed REITs to invest in hospitals, hotels and convention centres which wasn’t allowed earlier.