Given the indicative yield of 8.25 per cent, the REIT could be a good investment for those investors who are looking for better returns than bank fixed deposits in next 5-7 years, but it does have its own share of risks. Analysts said the product in no way is a substitute for fixed deposits and one must adopt caution while subscribing.
The REIT, backed by Blackstone and Embassy, has already witnessed subscription for more than half (55 per cent) of its size by strategic investors even before its opening, again a first for a public offering in India.
To invest in the IPO, investors will be required to bid for a minimum of 800 units in price band of Rs 299-300, i.e. Rs 2.39 lakh to Rs 2.40 lakh. Launched at 20 per cent discount to its NAV, the issue offers an indicative 8.25 per cent yield to be distributed in the form of dividend and interest in equal ratio.
Anlaysts said one must understand that it is a long-term play, just like holding a property where capital appreciation is as important as rentals. The risks are hence same as holding a property.
On Monday, a creditor to one of the equity partners in an underlying asset of Embassy REIT claimed that a court order restrains the REIT from including assets owned by the partner, Mint reported. The issue was seeing trading as of 12.30 pm.
Returns from the REIT would depend on the quality of the property, the tenant, the city and the micro market. In the short term, 7-8 per cent returns are likely. Long-term returns can be higher at 14-15 per cent, analysts said.
REITs resemble a mutual fund, wherein several investors pool in funds with real estate as the underlying asset class, said Arvind Nandan, Executive Director-Research at Knight Frank India.
The Embassy Office Park REIT comprises seven office parks and four office buildings, totalling 32.6 million square feet as of March 31, 2018. All completed (88.9 per cent market value) and under-construction (11.1 per cent) properties are valued at Rs 34,000 crore. Bengaluru is the biggest by geography, accounting for 60 per cent of market value, followed by Mumbai (16.2 per cent), Pune (14.4 per cent) and Noida (8.9 per cent).
“Invest with caution. It is the first experiment. So, put a small amount and then see how it goes,” said Pranay Vakil, chairman of Pra-ron Consultancy, expressing concerns over high concentration of the properties under the REIT in Bangalore.
“It does not depend on what interest you are going to get, but the appreciation in real estate, which has been very slow in last few years. So, if it does happen, then that is the kicker we will get,” he said.
The instrument is new and untested. Choice Broking noted that investors have in the past burnt fingers in two listed InVITs, which are trading below issue prices. Due to poor performance, the yield expectation has gone up to 12-13 per cent for the InVITs.
“It will take time to displace investors from other instruments to this investment instrument.But with best in-class infrastructure and presence in high growth market, the REIT would continue to demand premium rentals. This coupled with low office vacancy, professional management; growth in the sector along with transparent & accountable structure would mostly appeal the investor,” the brokerage said.
In a REIT, the investment manager invests the money in properties and ensures the upkeep of the assets. The returns are generated through rental income from the property, and capital value appreciation. The asset manager (in this case Embassy Office Park REIT) is required to distribute annuity income to unit holders at a regulator defined frequency.
Embassy REIT has 95 per cent committed occupancy, which as per its red herring prospectus, is 10 per cent higher than the overall India office market. It has average weighted average lease length of 6.9 years. JP Morgan, DBS, Swiss Re, Google, McKinsey, IBM and Nokia are among 160 tenants comprising a mix of blue-chip multinational and Indian corporates.
Vikram Chhokar, who heads the wealth management business of Karvy Private Wealth for the North and East regions, said: “By their very nature REIT cannot be a substitute to FDs. Pure ‘fixed deposit’ investors should stick to fixed deposits. Non ‘fixed deposit’ long term fixed income investors may look at REITs. The returns are expected to be better once the REIT starts to exit the commercial assets hence holding for the long term is recommended.”
If the investment is long term and the investor has the ability to liquidate the investment at the time of his choosing, then the investment in REIT is worth the extra risk, Chhokar said.
In an interview with ETMarkets.com, Vikaash Khdloya, Deputy CEO & COO, Embassy Office Parks said rentals in markets such a Bangalore and Pune grew at 10 per cent CAGR over the last five years. “Bangalore, in fact, continues to be one of the best markets in terms of numbers globally,” Khdloya said.
The projected five-year returns on commercial assets in India is 14 per cent. Since 2017, the Grade A commercial real estate rentals has been steadily rising and it has of late attracted fancy of NRIs and domestic HNIs.
“The good thing about the REIT is that from the Day 1 you start getting rental income. On maturing of rental contracts after 2-3 years, rents go up. So, 7-8 per cent is the expected rental income, another 2-3 per cent is expected from rental increase and 4-5 per cent from capital appreciation,” said Shobhit Agarwal, MD and CEO, Anarock Capital.
Motilal Oswal Financial Services noted that leasing income for Embassy REIT is expected to grow from Rs 1800 crore in FY19 to Rs 2500 crore in FY21, driven by embedded organic growth opportunities (MTM re-leasing), leasing of vacant space, on-campus development, acquisitions and ROFO (right of first offer) with Embassy REIT’s sponsor.
“Contract revenues and re-leasing to existing tenants at market rents should see revenue from operations increase to 46.4 per cent over FY20/ FY21. Due to significant mark-to-market re-leasing opportunity (29.3 per cent area expiring over 4QFY19) backed by strong fundamentals, Embassy expects additional rent of Rs 17.6 crore over FY20-21,” the brokerage said.
Since REITs need to ensure that 90 per cent of net distributable cash is distributed as dividends, Nandan of Knight Frank said, all eyes will be on the performance aspect in the initial days.
Last year foreign institutional investors like Japan’s NikkoAm-Straits Trading Asia and US’ North Carolina Fund, among others, receive SEBI approval to invest in India under REITs.
