REIT route to bank recapitalisation

By S Sriniwasan

The woes of the banking system are well known and the urgency for finding the solution is acutely felt by all. While institutions like an ARC/Bad Bank and now AIF/ Asset Management Company have been suggested, there appears no light at the end of the tunnel. The general consensus is that the problem requires surgery and a multi-pronged approach.

In this context, a couple of unrelated developments were worth noting. The first was IDBI Bank selling its office block in Bandra Kurla Complex (BKC) to SEBI for Rs 1,000 crore — much needed capital for them. The second, FDI investment in real estate last year topped $7 billion, where the bulk of the investment was in fullybuilt office assets. Couple this with the government’s keenness to get a REIT market going in India and we have an interesting situation.


As we look around areas like BKC in Mumbai and Sansad Marg in New Delhi (as examples), we find that beleaguered PSU banks occupy prime office space, much of which is in need of refurbishment, with significant potential for redevelopment into larger and better buildings with better parking and infrastructure.

Anecdotally, Allahabad Bank, Punjab National Bank, State Bank of India, Bank of Baroda, Indian Overseas Bank and few others occupy close to 30 lakh sq ft of office space at prime locations in Mumbai like Nariman Point, BKC and in New Delhi. The value of these properties will be negligible in their books. As prime properties, they are seriously underutilised in terms of the potential of the land.

This makes it an interesting proposition for long-term investors. Banks could sell of these assets into a REIT, for which they would receive purchase consideration. A rule of thumb value of say Rs 35,000 per sq foot would result in nearly Rs 9,000 crore to Rs 15,000 crore, if one includes some other assets in cities like Kolkata, Chennai and Bengaluru.

The government could consider appointing NBCC as the sponsor and manager for the REIT. NBCC has the necessary skills and capabilities to redevelop some of the buildings into their full potential by itself or with a private joint venture partner who brings in capital. In fact, the present timing could probably be the best for such a move. NBCC has already developed offices in Kidwai Nagar, Netaji Nagar in New Delhi. Some of the banks can immediately vacate prime property and rent out these buildings and let their property be redeveloped. The potential growth in area, and consequently the rental growth, will attract both domestic and international capital.

The government can benefit from such a move in several ways:

A. It gets the much-needed capital from the public, but in return for an annuity asset ownership through a REIT and not through appropriating taxpayers’ money.

B. The REIT market can get a kick-start and a new asset class, which has the potential to attract significant global capital, gets created, thus opening a new source for foreign portfolio investors.

C. The growing domestic corpus of insurance, pension and provident funds can participate in a long-term inflation adjusted asset class. World over, insurance and pension funds own such prime properties.

The banks would pay a rent to the REIT which will be and operating expense for their P&L account. While the amount is meaningful, it doesn’t solve the capital requirement in its entirety. It is important to note that practically all of the income producing assets have been bought (approximately $7 billion) by foreign investors like Blackstone, Brookfield, GIC etc.

Why deny domestic savers the opportunity to own the best and prime assets in their home country? In fact, LIC is seriously underinvested in properties and this could be a much better way of acquiring annuity assets than capitalising and owning banks, given that its business requires long-tenure annuity assets. All these banks also hold investments in other market infrastructure companies which should be a part of the asset lightening process to raise the much-needed capital.

Also, add the Air India building in New Delhi and Mumbai to the REIT, it could be a mega recap programme!

(The author is managing director, Kotak Investment Advisors. Views expressed are personal.)