One Size Fits None: Reading Indian REIT and InvIT Data Against a One-Dimensional Leverage Cap

[Varun Soni is a graduate from the National Law School of India University, and an upcoming associate at AZB and Partners]

Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) operate under a peculiar financial straitjacket. According to their governing regulations, they must distribute at least 90% of their distributable cash flow to unitholders. These trusts are also subject to hard caps on how much they can borrow. Their leverage is limited to 49% of asset value for REITs (extendable to 75% for AAA-rated InvITs). Standard corporate finance theory prizes the freedom to reinvest earnings and treats debt as a primary growth tool. The REIT and InvIT model deliberately curtails both. This post examines whether the resulting constraints are still fit for the purpose these vehicles are intended to serve as the Indian investment trust market matures.

The Governance Rationale: Why the Constraints are Features, Not Bugs

The distribution mandate and leverage cap are best understood as integrated governance responses to the principal-agent problem inherent in collective real estate investment. Trust managers (agents) control portfolios of illiquid, difficult-to-value real assets on behalf of unitholders (principals). Left unchecked, they may be tempted to overborrow in two ways: to fund distributions in lean periods, preserving their performance reputation at the expense of balance-sheet health, and to expand asset size where their management fees are linked to net asset value (NAV), net acquisitions, or net distributable cash flow (NDCF). Indian REITs and InvITs commonly structure their investment management fees as a percentage of one or more of these metrics, making this risk more than theoretical. PowerGrid InvIT, for example, includes ‘0.10% of the aggregate Gross Block of all Holding Companies and SPVs acquired by the InvIT’ as a fee component.

The two rules work in concert. Mandatory distribution prevents managers from accumulating internal capital that could fund value-destroying acquisitions, and it forces them to return to capital markets for growth, subjecting their plans to the scrutiny of bankers and institutional investors. Leverage caps directly mitigate credit risk and preserve the low-risk, income-oriented character that makes REITs and InvITs a distinct asset class. SEBI’s Master Circulars for REITs and InvITs have rightly prohibited the use of external borrowings for distributions, neutralising one variant of the agency risk. The risk of leveraging up to grow assets under management (AUM)-linked fees, however, persists.

The Problem: A Static Cap in a Dynamic Market

While the rationale for leverage caps is sound, the current Indian framework applies a single asset-value-based ceiling to all trusts, irrespective of their actual capacity to service debt. A trust with exceptional cash flows faces the same ceiling as one whose earnings barely cover its interest obligations. Table 1 below, drawn from the annual reports and credit rating reports of all listed Indian REITs and InvITs for the financial year (FY) 2024-25, illustrates this disparity.

Table 1: Leverage and Debt-Servicing Capacity of All Listed Indian REITs and InvITs (FY 2024-25)

Trust	ICR (Interest Coverage Ratio)	DSCR (Debt Service Coverage Ratio)	Net Debt / Asset Value
Public Real Estate Investment Trusts
Mindspace Business Parks REIT	3.50x	4.50x	24.3%
Embassy Office Parks REIT	2.25x	2.25x	32.0%
Brookfield India Real Estate Trust	1.50x	4.10x	24.7%
Nexus Select Trust	4.27x	N/A	17.0%
Public Infrastructure Investment Trusts
Capital Infra Trust	18.85x	5.72x	43.0%
POWERGRID Infrastructure Investment Trust	15.83x	14.89x	9.15%
IndiGrid Infrastructure Trust	2.08x	2.08x	48.5%
IRB InvIT Fund	4.09x	3.65x	42.0%
Indus Infra Trust	N/A	N/A	29.2%

Sources: Annual reports and credit rating reports of the respective trusts (Mindspace, Embassy, Brookfield, Nexus, Capital Infra, PowerGrid InvIT, IndiGrid, IRB InvIT, Indus Infra). All data for FY 2024-25.

The contrast between Capital Infra Trust and IndiGrid Infrastructure Trust is the clearest demonstration of the regulatory gap. Capital Infra Trust carries borrowings equivalent to 43% of its asset value, placing it near the threshold requiring credit rating approval. Yet its interest coverage ratio (ICR) of 18.85x signals that it generates nearly nineteen rupees of operating earnings for every rupee of interest expense, a debt-servicing profile that most investment-grade corporates would envy. IndiGrid Infrastructure Trust, by contrast, operates at a higher leverage of 48.5% with an ICR of just 2.08x. Under current rules, both trusts face largely similar regulatory treatment, despite vastly different risk profiles. The framework neither rewards the responsible manager nor adequately flags the leveraged one.

The stakes are material. Indian REITs and InvITs raised over ₹31,000 crore in FY 2024-25 (per SEBI’s published statistics). The cost of debt for these entities is also meaningfully lower than their cost of equity: Embassy REIT’s cost of debt is approximately 6.78% against an equity cost of approximately 7.34%; IndiGrid InvIT also shows a comparable differential. Allowing cash-flow-strong trusts to access more debt would benefit unitholders, since the cost of debt is around 60 basis points cheaper than that of equity. The current framework, by treating all trusts identically, prevents this.

A Hybrid Regulatory Model: Combining Asset-Value Caps With Cash-Flow Metrics

The solution is not deregulation; it is dynamism. Several jurisdictions have already moved in this direction. The Monetary Authority of Singapore conditions access to higher leverage on an ICR threshold, linking borrowing capacity directly to the ability to service debt. India and the Philippines use tiered, rating-linked caps; the United States leaves leverage to market discipline (lenders and rating agencies), though American REITs have historically averaged 50–60% leverage across a market over six decades old.

India’s current tiered model is embodied in regulation 20A of both the REIT and InvIT Regulations. It requires a credit rating for leverage above 25% of asset value for REITs, and an AAA rating for InvITs to exceed 49%. This already gestures toward dynamism, but the dynamism is not in any way tied to the leverage servicing capacity of the trusts, and hence is not risk-sensitive. The logical evolution is to add a cash-flow-based layer. This post proposes a hybrid model for REITs: the existing 49% asset-value ceiling would be retained as a baseline. Trusts seeking to borrow beyond 49% (up to a proposed ceiling of 59%) would be required to: (a) obtain a credit rating of AA or better; (b) secure unitholder approval; and (c) demonstrate and maintain an ICR of at least 3.0x (above industry standards) for the six months preceding the additional borrowing, with prompt disclosure to the stock exchanges and SEBI if the ratio falls below the threshold and an undertaking to rectify it within three months. The proposed changes would require an amendment to regulation 20 of the SEBI REIT and InvIT Regulations.

A possible objection to the proposed amendment is that credit rating agencies already evaluate ICR and DSCR before assigning ratings. This is true but insufficient for two reasons. First, for REITs, any credit rating (including BBB-) currently satisfies the regulatory trigger for borrowing above 25%; the rating quality is immaterial to the regulatory gate. Second, the risk of rating inflation by agencies incentivised by the rated entity is well-documented (the 2008 credit rating crisis), and relying on ratings alone creates a single point of failure in the governance architecture. An independent regulatory ICR/DSCR floor adds a layer of discipline that rating assignment cannot replicate, since it replaces subjectivity with raw data.

Conclusion

The leverage constraints on Indian REITs and InvITs are not relics of over-caution; they are purposefully designed to address the agency costs that collective real estate investment generates. But a static, asset-value-only ceiling treats genuinely different risk profiles identically. The financial data for FY 2024-25 reveals that some Indian trusts are operating well within their debt-servicing capacity at leverage levels that the current framework treats as approaching the ceiling. A hybrid model that adds a cash-flow metric, specifically an ICR/DSCR floor, to the existing tiered asset-value cap would make Indian REIT and InvIT regulation more risk-sensitive, reward efficient trust managers with greater financial flexibility, and better protect unitholders in genuinely leveraged situations. As these markets raise increasingly large sums from the capital markets and continue to mature, the time for this evolution is now.

– Varun Soni