RBI set to allow banks to lend directly to REITs in real-estate boost

Analysts say bank lending to REITs is risky as the real estate sector is prone to boom-bust cycles.

The Reserve Bank of India plans to allow banks to lend directly to the real estate investment trusts, or REITs, to unlock fresh funding for the real estate sector.

REITs, or real estate investment trusts, own and operate office parks, malls and warehouses in India. (Reuters)

There will be “certain prudential safeguards” for such transactions, RBI Governor Sanjay Malhotra said while presenting the RBI’s monetary policy on Friday.

REITs, which own and operate office parks, malls and warehouses, have attracted attention of institutional investors that want to get into India's real estate sector.

RBI's move will make it easier for REITs to raise capital, while lowering expenses, and speeding up asset expansion in the office and retail segments, said Anuj Puri, chairman of property consultancy Anarock Group, adding that this would improve the sector’s appeal to investors.

Still, analysts say lending to REITs is risky as cash flows in real estate sector are very sensitive to occupancy, rental cycles and interest rates. Boom-bust cycles in real estate have put pressure on assets of banks in the past.