Towers under construction in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

New InvIT, REIT Norms Will Help Widen Investor Base, Says ICRA

The market regulator’s move to lower subscription requirements and reduce lot sizes for trading in real estate and infrastructure investment trusts will help draw retail investors to such instruments, according to credit rating agency ICRA Ltd.

Listed infrastructure and real estate investment trusts can be a transparent and stable investment option for retail investors, ICRA said, adding that the market watchdog’s amendment to the norms will boost the reach of these financial instruments. Earlier, the investment options for retail investors in income-generating InvITs and REITs are limited owing to “high minimum investment requirements”, it said.

The Securities and Exchange Board of India on Tuesday reduced the minimum subscription requirement and defined trading lots for REITs and InvITs. The minimum subscription for publicly issued REITs and InvITs stands at Rs 1 lakh and Rs 50,000, respectively, now. The minimum trading lot for InvITs has been reduced from Rs 5 lakh to Rs 1 lakh, and for REITs from Rs 1 lakh to Rs 50,000.

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That follows India’s first REIT— Embassy Office Parks— raised Rs 4,750 crore in its initial public offering, and was oversubscribed more than two-and-a-half times. It opened 8.3 percent higher in its market debut. And it came nearly two years after InvITs sponsored by IRB Infrastructure Developers and Sterlite Power went public. But interest came from institutional and high-net-worth investors.

Increased Leverage Limit To Affect Debt Servicing?

SEBI ruled that InvITs can raise their leverage to 70 percent of total assets from the previous limit of 49 percent. This, however, is subject to additional disclosure and compliance requirements, including a minimum track record of six distributions on a continuous basis, and a ‘AAA’ credit rating or equivalent for consolidated debt.

“... at such a higher leverage, it would be difficult to meet the ‘AAA’ rating benchmarks.” ICRA noted, adding that with the new leverage limit, total debt to net-worth ratio will increase to 2.33 times compared to 0.96 times at the previous leverage levels.

“With higher leverage, the debt-service coverage ratio, a key ratio for measuring the credit-worthiness, would also be significantly lower—assuming other things remain same,” the rating agency said.

Heightened leverage limits, according to ICRA, will lead to a reduced cushion for debt servicing. “Hence, the stability of cash flows will become very crucial to maintain a strong credit profile.”

The InvITs that will benefit from this are the ones with underlying assets that include annuity road projects, transmission projects having stable revenue since they will be able to maintain their credit profile even with a higher leverage, the rating agency said, adding that assets such as toll road projects where the revenues are not fixed will require higher cushion to withstand volatility.

Also read: Are REITs An Option For Whiplashed Bond Investors?