Alongside the traditional asset classes such as equity, debt, and gold, India has over the last few years seen the emergence of a new offering: Real Estate Investment Trusts (REITs). At the moment, there are 3 listed REITs and 1 mutual fund that offers exposure to international REITs. Let us look at them and try to assess their performance.
REITs as a concept
Before we begin, it’s important to brush up on basics. REITs are listed and traded on stock markets just like Exchange-Traded Funds (ETFs). A demat account is mandatory for investing in REITs in India.
At present, you have 3 options – Embassy Office Parks REIT, Mindspace Business Park REIT and Brookfield India Real Estate Trust. Open market purchases of REITs are allowed by broking platforms in 200 units (minimum lot size). This means at present you would require between Rs 50,000 to Rs 65,000 to directly purchase REIT units.
Apart from stock market purchases, you can also invest in REITs through mutual funds. Currently, Kotak International REIT Fund of Fund is the only international mutual fund in India that invests only in international REITs. A few domestic mutual funds have also started investing in REITs in the past few years, however, the actual exposure of these schemes to REITs is quite small.
The primary reason to invest in REITs is to diversify your investment portfolio through exposure to commercial reality. But do note that hybrid work-from-home (WFH), new construction, and interest rate risks have tempered investors’ enthusiasm in India’s office space. The extension of COVID-19 restrictions has resulted in most of the local workforce working in technology, BFSI, and consulting sectors (large occupiers of Grade A office space) to continue to work from home for more than a year.
Due to the rising WFH trend as a result of the pandemic, organisations are increasingly evaluating hybrid work strategies that will involve some time of the week working from home, thus reducing the need for office space. Investors are also concerned that new supply will put pressure on rentals. Also, rising interest rates negatively impact the valuation of yield assets like REITs at least over the immediate term. Don’t rule out further near-term weakness if interest rates rise and office spaces report increased vacancies.
In this backdrop, REITs should form 10 per cent of your overall investment portfolio.
REIT options
Embassy Office Parks REIT – Embassy Office Parks REIT is India’s first listed REIT and the largest in Asia by area. It has a 42.4 million square feet. It has 195 blue-chip tenants. Almost 48 per cent of gross rent is from Fortune 500 occupiers. It has nearly 90 per cent occupancy. It also has 1614 keys (hotel rooms). In the 4th quarter, the REIT reported strong cash collections but Covid impact was visible on softer rental growth. The NAV of the REIT is Rs 296. The REIT market price is Rs 327. The REIT’s IPO price was Rs 300. Q4 distribution is Rs 5.6 per unit. For FY21, the distribution payout ratio was 100 per cent. Do note that Q4FY20 distribution was Rs 21.48 and FY20 full distribution was Rs 24.39. Nirmal Bang Institutional Research has a target price of Rs 332 for Embassy Office Parks REIT
Mindspace Business Park REIT – Mindspace Business Park REIT is India’s second listed REIT. It is a owner and developer of quality Grade A office portfolio located in four key office markets of India. It has 30.2 million square feet. It has over 160 tenants. Committed occupancy is 84.2 per cent. Gross contracted rent from foreign MNCs is 82.9 per cent. Recent Q4 numbers indicate rising vacancy which can be a concern. The NAV of the REIT is Rs 345.2 and the REIT market price is Rs 288. The REIT’s IPO price was Rs 275. Q4 distribution is Rs 4.8 per unit. For FY21, the distribution payout ratio was Rs 9.59 per unit. Nirmal Bang Institutional Research has a target price of Rs 294 for Mindspace Business Park REIT. That’s more upside than Embassy Office Parks REIT.
Brookfield India Real Estate Trust – Brookfield India Real Estate Trust is India’s only institutionally managed public commercial real estate vehicle. It is the 3rd listed REIT and sponsored by an affiliate of Brookfield Asset Management, one of the world’s largest alternative asset managers. Its portfolio consists of four large campus-format office parks with a total 14 million square feet. The Brookfield India Real Estate Trust REIT has a committed occupancy of 87 per cent. Its net asset value is at Rs 317 per unit. In March 2021, the REIT said that it estimated to distribute a total of Rs 12.75 per unit over the next two quarterly distributions. The stock market price of each REIT unit is Rs 249. HSBC has a price target of Rs 285.
Kotak International REIT FoF (Fund of Fund) – This is India’s first global REIT FoF. To be clear, the money you invest in Rs 160-crore Kotak International REIT FoF gets invested in units of SMAM ASIA REIT Sub Trust Fund and/or other similar overseas REIT funds. Kotak International REIT FoF was launched in December 2020. Its money is allocated to varied REITs across Singapore, Australia, Hong Kong, New Zealand and Thailand. The REITs are backed by properties such as data centres, logistics, residential, offices and warehouses. Less than six months of price returns of the fund does not mean much in terms of return potential. International REITs give global exposure.
