Both the fundraising avenues are gaining currency in India, following the footsteps of the developed world and a deeper debt market where investors can discern risks and returns across infrastructure asset classes, and stable regulations will be critical to achieving this goal.
A government task force has estimated that Rs 111 lakh crore of investments are required in infrastructure through fiscal 2025 – or twice what was spent in the past five fiscals. This is a humongous investment need, and cannot be met by the government and traditional infrastructure-financing channels alone. Thus, alternative channels need to be pressed into service, the ratings agency said.
InvITs and REITs can play a significant role here as their combined assets under management (AUM) have logged a whopping 42 per cent compound annual growth rate (CAGR) since the launch of the first InvIT in fiscal 2018 to nearly Rs 2 lakh crore now.
“Investments under InvITs and REITs can grow by another Rs 8 lakh crore over the next five fiscals, driven by an enabling regulatory framework, ample availability of operational infrastructure2 and real estate assets, and increasing appetite from global and domestic investors looking to invest in high-yield assets,” said Manish Gupta, Senior Director, CRISIL Ratings.
There is also support from regulation, such as cap on leverage and allowing investments in operational assets. Regulations also stipulate a AAA rating threshold for listed InvITs if their debt-to-AUM ratio exceeds 49 per cent, among other conditions, which reduces the credit risk. Further, mandatory distribution of surplus cash also enhances investor confidence.
Currently, there are 11 InvITs and REITs in India. Credit ratings on ten of these demonstrate the highest safety level (AAA) for three reasons: low debt, combined debt-to-AUM ratio of less than 35 per cent, and over 90 per cent of AUM deployed in operational assets, CRISIL noted.
Lower leverage in most situations is driven by regulations, but this is set to change. Recent rules afford setting up of an unlisted private InvIT sans any cap on leverage or ratings, or curbs on investments in operational assets.
While this could raise credit risks by some extent, it may still support holistic market development. Such InvITs are increasingly generating investor interest given the flexibilities offered and the opportunity to balance the interests of lenders and investors.
According to CRISIL, even lower-rated InvITs and REITs are accepted globally. For instance, 12 per cent of S&P Global’s rated REITs in the US are in the ‘BB’ category, while 77 per cent are in the ‘BBB’ category. To be sure, these ratings are on their bank loans, or debt instruments, indicating the likelihood of timely payment of the obligation under the rated instrument – and not a comment on the potential returns to unitholders, which are anyway subservient to debt.
As the market expands and regulations open up, the landscape will change, necessitating sharper differentiation in the credit and operating risks of InvITs and REITs.
InvITs and REITs have the potential to emerge as an important tool to address India’s gigantic infra financing needs. Debt market depth, greater understanding of operating and credit risks among investors and unitholders, and stable regulations are essential to achieve projected growth.