The over-subscription of India’s first Real Estate Investment Trust (REIT) issue, which closed Wednesday, points to a positive investor appetite for backing assets in the otherwise fund-starved real estate sector.
The success of the Embassy Office Parks’ — a joint venture of Blackstone and realty firm Embassy — REIT issue in raising Rs 4,750 crore, opens a new avenue for investors wanting to invest in rent-yielding property assets without having the need to actually own them. According to final subscription figures, the REIT issue was subscribed 2.58 times. While the institutional portion got subscribed 2.15 times, the non-institutional portion received 3.1 times subscription.
Embassy Office Parks had in September last year filed the draft red herring prospectus with the Securities and Exchange Board of India to launch REIT having a portfolio size of 33 million sqft comprising of seven business parks and four city-centric buildings spread across Mumbai, Bengaluru, Pune and Noida. Out of the 33 million sq ft, about 24 million sq ft area is operational at 95 per cent occupancy and yielding rental income of over Rs 2,000 crore annually. Another 3 million sqft area is under construction and 6 million sqft area in pipeline.
Knight Frank India CMD Shishir Baijal said it took over a decade and half for India’s first REIT to come to fruition. India’s first REITs offering is also the largest in Asia and it reflects the success of commercial real estate. “The commercial office space absorption in India has been performing exceedingly well reaching a historic high of 47 million square feet in 2018. The market confidence on the realty index is a direct reflection of the success and we hope the sentiments remain positive,” he said.
How does it work
Unlike shares, investors in a REIT get units, somewhat similar to units in a mutual fund. Embassy REIT has kept a price band of Rs 299-300 per unit, with a minimum bid lot size of 800 units. A REIT owns a number of rent-yielding commercial and hotel properties, and the unit-holders get a portion of this rental income in the form of dividend and interest income in proportion to their equity contribution.
It gives the investor an option to buy partial stake in rent-yielding commercial properties, with the benefit of a professional manager managing these assets. Increase in rentals of underlying assets, improvement in occupancy rate and commencement of under construction properties are the growth drivers that an investor can benefit from.
The net distributable cash flows of the Embassy REIT are based on the cash flows generated from the assets. In terms of the REIT Regulations, at least 90 per cent of the net distributable cash flows are required to be distributed to the Embassy REIT. The trust distributes the cash flow to unit-holders in the form of dividend and interest income, generally, once every quarter.
Since the REIT will be using most of the funds raised through the initial public offer to retire debt, the distributable cash flows are likely to rise post the issue.
What are the risks
Since this is the first REIT issue, there is no comparable data in terms of pricing and attractiveness of the issue. Real estate properties are always prone to litigation and operational challenges. Even though its assets are in cities offering good rental clients, the rate of occupancy is always a critical factor. Also, with future development of new office spaces in upcoming areas, the old buildings lose their charm and thereby their premium to get higher rental.
The management fee and operating expenses can rise, eating into the returns of investors. The biggest concern is the valuation of the units. Since the Net Asset Value of the REIT is based on estimated future cash flows and certain assumptions, it is difficult to gauge the margin of safety for an investor.