Real estate is one of the favourite and oldest asset classes in India. One of the reasons for the same is its physical appearance, and hence the trust associated with an asset being tangible - unlike equity investments or bonds. The majority of real estate owned by Indians is for self-consumption; there’s an emotional attachment with respect to the notion of owning a house.
When we talk about real estate as an investment, the source of income from the same is through rents and leases for both commercial and residential use. Commercial rents usually give better returns.
When it comes to options for investing in real estate it becomes difficult for retailers as ticket size for real estate goes north of INR 1Cr. Real Estate Investment Trusts (REIT) solve this problem. REITS provide an opportunity to own a fraction in a trust that benefits from leasing properties. This gives exposure to real estate as an asset class without actually owning and maintaining the property.
A Real Estate Investment Trust (REIT) is a vehicle that owns a portfolio of income-generating real estate assets. A REIT is created by a sponsor, who transfers ownership of assets to the trust in exchange for its units.
Just like a mutual fund where money is pooled from investors and they are allocated units, REIT units are allocated to represent ownership of real estate assets.
Profits are generated in the form of dividends and capital appreciation.
Weighted Average Lease Expiry (WALE): WALE shows the time left till the property is vacant - i.e. the average time to expiry for the entire REIT. The higher the WALE, the better.
Loan to Value (LTV): LTV measures the amount borrowed against the value of the property.
Most of the available REIT options in India are commercial REITs, meaning they own commercial land banks. Available option in India are:
1. Embassy REIT
2. Mindspace REIT
3. Brookfield India REIT
Sponsored by Embassy & Blackstone, Embassy REIT is the first listed REIT & the largest in Asia (by area). The company owns and operates 42.4 MSF (million square feet). It has a portfolio of eight office parks, two hotels, and a 100 MW solar power plant. Embassy comprises 32.3 MSF completed operating area with an occupancy of 88.9% as of March 31, 2021.
Bangalore is their biggest market with 72% of the asset value, followed by Mumbai (11%), and Pune (10%). The top ten tenants contribute 39% of rentals. Embassy REIT has a WALE (Weighted Average Lease Expiry) of 7 years.
In the last 3Y the company grew its revenues at a CAGR of 12.1% to 2360.3 Cr. EBITDA grew by 14.1% CAGR during the same period to 1492.9 Cr as of FY21.
Mindspace REIT is sponsored by K Raheja Corp Group. It has a strong portfolio of office spaces across Mumbai, Pune, Hyderabad, and Chennai with a total leasable area of 30.2 msf.
The top ten tenants contribute 40.3% of rentals and are at 84.2% occupancy. WALE stands at 6 years.
In the last 4Y, the company has grown its revenue by 8.9% CAGR to 1629.3 Cr. It was up by 5.1% in FY21. The NAV has increased from 326.1 at the time of IPO (July 2020) to 345.2 as of Mar 2021.
Brookfield REIT is sponsored by Brookfield AMC and is India’s only institutionally managed commercial real estate vehicle. With commercial properties in Mumbai, Gurugram, Noida, and Kolkata, their initial portfolio comprises 14.0 million sq. ft., with rights to acquire further 8.2 million sq. ft.
The NCR region contributes 56% of the total asset value. The company has an occupancy of 91% and WALE of 7 years. Brookfield is heavily dependent on few clients; Accenture, TCS, and Cognizant contribute 49% of the leased area.
Revenue was down by -9.8% to 863 Cr in FY21. Loan to value stands at 18%. The company has a total debt of 2120 Cr. The cost of borrowing is relatively high at 7.15% when compared to its peers; management had guided to bring it down to 6.45%.
In Apr 2021, Brookfield converted Rs. 1010 Cr of Compulsory Convertible Debentures held by the REIT into equity share as a repayment of shareholder’s loan.