- Wealth PMS (50L+)
Which is the best of the three REITs in India?
Brookfield, if you’re looking for capital appreciation. Mindspace, if you’re looking for high tax-free yield. Read on for our take on why.
India saw its first REIT (Real Estate Investment Trust) in 2019. Two years later there are now three (Mindspace REIT, Brookfield REIT, and Embassy REIT). REITs as an investment option have gained significant popularity among institutions & retail investors.
Real Estate Investment Trust (REIT) is a tax-efficient 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.
Think of it like a mutual fund, where money is pooled from investors. In return they were offered mutual fund units. Instead of shares of public companies, REIT units represent ownership of real estate assets.
Profits are generated in the form of dividends & capital appreciation.
The traditional valuation metrics like PE, EPS growth, Margin expansion etc do not apply here. There are certain parameters to consider while evaluating the REITs. Let’s understand each of them.
The biggest risk of running a commercial property is vacancy. WALE is used to calculate the time left for property to go vacant. It is measured in years. The higher the better.
By law REITs have to pay 90% of distributable cash flows to the investors. Distribution yield is a metric to measure these payments. However this is not a guaranteed payout. It depends on the trust performance. Again the higher the better.
Loan to Value (LTV) measures how much debt was borrowed compared to the underlying asset value. Just like any other business, the low leverage the better.
NDCF is a key metric to show how much money is left to distribute to the unit holders. Usually all REITs have two layered structure.
As per SEBI guidelines,
The consistency of NDCF is an important metric to keep an eye on.
The occupancy rate is the percentage of the square foot available in the portfolio of REIT. This is an important metric of its performance. This ensures consistency in payouts, increasing rental & dividend income. The higher the occupancy, the stable are the cash flows. Having said that, it is unlikely to have 100% occupancy always.
A well managed property in prime location will have the highest occupancy rate. On the other side, oversupply of properties can reduce occupancy rates & rental income. REITs having diversified portfolio across geographies & tenants are less prone to oversupply & concentration risk.
NAV is one of the best way to assess REITs. Think of it like a Book value per share. It is calculated as the estimated market value of the properties minus all liabilities. This divided by number of shares outstanding. NAV is more accurate way to determine share price of REIT.
Many a times, REITs tend to trade below or above NAV. This happens because of supply & demand of the traded units. In such cases, we have to keep an eye on share price distance from NAV.
A strong sponsor will have many advantages like brand recognition, trust factor, on time delivery etc. REITs will also have Right of first offer (ROFO) on properties owned by the sponsors.
The cash distributed to the unit holders is a combination of three parameters – Interest income, Dividend income & Repayment of debt. Taxation works the same for all REITs except for Dividend income. It depends on the tax regime the SPVs had opted for.
Unit holders are taxed at the same rate at which REITs are taxed. REITs having the highest non taxable portion of NDCF are likely to gain higher interest among investors.
You can buy units of REITs just like shares through regular trading accounts on BSE and NSE, the major exchanges.
Image below shows BSE and NSE codes for the three REITs on zerodha.
BIRET stands for Brookfield REIT.
Before arriving at our overall recommendation, a brief note for each REIT to understand similarities and differences.
Sponsored by Embassy & Blackstone, Embassy REIT is the first listed REIT in India & the largest in Asia (by area). The company owns & operates 42.8 MSF (million square feet). It has a portfolio of eight office parks, six hotels (two are under-construction) & a 100 MW solar power plant. It comprises 33.8 MSF completed operating area with an occupancy of 87% as of March 31, 2022.
Bangalore is their biggest market with 74% of the asset value, followed by Mumbai (10%) & Pune (9%). Top 10 tenants contribute 39% of rentals. The company has a WALE (Weighted Average Lease Expiry) of 7 years.
In the last 3Y the company has grown its revenue at a CAGR of 11.4% to 2962.6 Cr. EBITDA grew by 11.2% CAGR during the same period to 2425 Cr as of FY22.
NOI grew by 23% YoY, with operating margins of 84%. In Q4FY22 the company successfully locked-in 62% of the total REIT debt at a fixed interest rate. This brought down the average cost of borrowing from 6.9% to 6.5%.
Unlike other REITs, Embassy has exposure to hotels in its portfolio (4% of their GAV). If work related travel remains muted, this segment will continue to be a dragger on their operations. The company took a rent escalation of 14% on 7.7 msf across 89 leases in FY22. This will aid 10-15% to the NOI growth.
Mindspace REIT is sponsored by K Raheja Corp Group. It has a strong portfolio of office spaces across Mumbai, Pune, Hyderabad & Chennai with a total leasable area of 31.8 msf.
Top 10 tenants contributes 36.5% of rentals. They are at 84.3% occupancy. WALE stands at 6.9 years.
In the last 4Y, the company had grown its revenue by 6.9% CAGR to 1750 Cr. It was up by 53.77% in FY22. The NAV has moved up from 326.1 at the time of IPO (July 2020) to 364.9 as of Mar 2022.
Snippet from Mindspace REIT Investors Presentation
Mindspace offers a higher post tax yield (90% of NDCF). All SPVs are 100% owned by REIT except for Mindspace Hyderabad (11% is owned by Government of AP).
Net Operating Income (NOI) is up by 8.2% to 1486.4 Cr. The distribution yield currently is at 5.37%. Loan to Value is at 15.7%. Net debt to NOI at 2.82 times.
Brookfield India REIT is the new kid on the block. It is sponsored by Brookfield AMC & is India’s only institutionally managed commercial real estate vehicle. They have commercial properties in Mumbai, Gurugram, Noida & Kolkata. Their total portfolio comprises 18.6 Million SqFt, out of which 4.7 Million SqFt will be developed in the future.
NCR region contributes 67% of the total asset value. The company has an occupancy of 83% & WALE of 7.3 years. The company is heavily dependent on few clients. Accenture, TCS & Cognizant contributes 41% of the leased area.
The revenue is down by 12.28% to 756.8 Cr (TTM). Loan to value stands at 33%. The company has a total debt of 2250 Cr. The cost of borrowing is relatively high at 6.76% when compared to its peers.
The portfolio has a well-staggered lease expiry profile. This will increase the Mark to Market to 34% by FY23. NAV is at 324/- per unit as of Q2FY22.
The company has Right of First Offer (ROFO) on certain properties owned by Brookfield Group. These new assets have the potential to:
All three of them are well-managed trusts with strong balance sheets. They have similar growth opportunities for the long term.
However, some exhibit better performance than the other two in few parameters.
In the chart below, click REIT name to see their exposure by geography
In chart below, click REIT name to see exposure by sector
The answer varies depending on your context as an investor.
Mindspace REIT if you are conservative and taking a debt investors’ point of view. With well-diversified portfolio & highest tax free distribution, this suits HNIs as a good long-term bet. Low occupancy (84.3%) & consistency of cash flows will be a risk though.
Brookfield REIT if you are a growth investor looking for capital appreciation. Considering all important metrics like WALE, decent yield, Occupancy etc, Brookfield either leads the pack or is at par with others. The company has the highest headroom for further growth in-terms of proposed development and gives us the visibility of growth.
Taking a holistic view, Brookfield REIT is better placed to capture the growth & provide decent stability in the cash flows.
In the order of preference, we like
Brookfield India REIT > Mindspace REIT > Embassy REIT
The Covid scare is over for REITs. Most of the offices have started or are in the process of bringing their employees back. This will increase the visibility & occupancy of the industry. Surely, REITs are slowly emerging as a new asset class of quasi debt with direct play on commercial real estate.
Other relevant reading:
NOTE: This article is for informational purposes only and should not be considered as investment advice.
Get immediate access to model portfolios, premium research, and the unparalleled Capitalmind Premium Investor community Join, probably, the best investment community in India.