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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.
Also read our post on The best InvIT in India
India saw its first REIT (Real Estate Investment Trust) in 2019. Three 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 REITs. Let’s understand each of them.
The biggest risk of running a commercial property is a vacancy. WALE is used to calculate the time left for the 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 a 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 more stable the cash flows. Having said that, it is unlikely to have 100% occupancy always.
A well-managed property in a prime location will have the highest occupancy rate. On the other side, an oversupply of properties can reduce occupancy rates & rental income. REITs having diversified portfolios across geographies & tenants are less prone to oversupply & concentration risk.
NAV is one of the best ways 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 is divided by the number of shares outstanding. NAV is a more accurate way to determine the share price of REIT.
Many times, REITs tend to trade below or above NAV. This happens because of the supply & demand of the traded units. In such cases, we have to keep an eye on the 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.
Unitholders are taxed at the same rate at which REITs are taxed. REITs having the highest nontaxable 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.
The 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 43.2 MSF (million square feet). It has a portfolio of twelve office parks, six hotels & a 100 MW solar power plant. It comprises 33.4 MSF completed operating area with an occupancy of 87% as of October 2022.
Bangalore is their biggest market with 74% of the asset value, followed by Mumbai (10%) & Pune (9%). Top 10 tenants contribute 37.4% of rentals, as compared to 42% in 2019. 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%. As of Q2FY23, the leverage (Net debt to Gross asset value) is at 26%. The cost of debt is currently at 7.1%.
Snippet from Embassy REIT Investors Presentation
Embassy is the only listed REIT that has exposure to hotels (6% of their GAV). The company took a rent escalation of 15% on 4.6 MSF across 28 leases in H1FY23. This will aid 10-15% of NOI growth next year.
Another key development is that, in Jan 2022, the Embassy group (one of the sponsors of Embassy REIT) in a share-swap deal valuing Embassy Group at 3940 Cr. This deal may not have a direct impact on the day-to-day operations of the REIT as it is a ring-fenced vehicle with its own cashflows and assets. However, the Embassy group stake sale may be an overhang in the medium term for the unit price.
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 31.9 MSF.
Top 10 tenants contribute 36.4% of rentals. They are at 86.9% occupancy. WALE stands at 6.8 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 370.3 as of Nov 2022.
Source: 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 the Government of AP).
As of H1FY23, the Net Operating Income is up by 13.5% 818.6 Cr. The distribution yield currently is at 6.9% and the Net debt to Gross asset value is at 16.8%. The cost of debt is at 7.3%.
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 18.7 Million SqFt, out of which 4.4 Million SqFt will be developed in the future.
Source: Brookfield India REIT website
NCR region contributes 67% of the total asset value. The company has an occupancy of 89% & WALE of 6.9 years. The company is heavily dependent on few clients. Accenture, TCS & Cognizant contributes 41% of the leased area.
In Dec 2021, Brookfield India REIT acquired Candor Techspace N2, one of the largest office parks in the NCR region with a 4.5 MSF leasable area & WALE of 8.5 years for 3970/- Cr. They financed this acquisition by a combination of debt & equity dilution. In Q2FY22, the revenues are up by 43.4% YoY to 303.6 Cr mainly on the back of this N2 acquisition.
The Loan to value stands at 31%. The company has a total debt of 2414 Cr. The cost of borrowing is relatively high at 7.45% when compared to its peers.
Source: BIRET Investors Presentation
The portfolio has a well-staggered lease expiry profile. This will increase the Mark to Market to 34% by FY25. NAV is at 337/- per unit as of Q2FY23.
The company has the 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 a few parameters.
In the chart below, click REIT name to see their exposure by geography
In the 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 a well-diversified portfolio & highest tax-free distribution, this suits HNIs as a good long-term bet. However, the mark-to-market headroom for FY23 is on the lower side when compared to its peers.
Brookfield REIT if you are a growth investor looking for capital appreciation. Considering all important metrics like mark-to-market, proposed development area, dividend yield, WALE, occupancy, etc, Brookfield either leads the pack or is at par with others. Post the acquisition of Candor N2 tech park, BIRET has higher growth visibility over the next 2-3 years.
Taking a holistic view, Brookfield REIT is better placed to capture the growth & provide decent stability in the cash flows.
Having said that, BIRET is facing challenges with respect to acquiring new leases and renewing existing ones. In the upcoming fiscal year, a significant proportion of its rental agreements, constituting 21%, are set to expire, and in addition, the company is reducing its quarterly dividends. That is a risk, you have to consider.
*click to enlarge
In the order of preference, we like
Brookfield India REIT > Mindspace REIT > Embassy REIT
REITs are interest rate sensitive. On an upward rate cycle, their cost of borrowing increases as they have to raise debt at a higher rate. It will impact their leverage profile & overall profits. They will go slow on debt-financed acquisitions.
In 2022, RBI gradually increased the Repo rate from 4% to 6.25% as of Dec 2022. The yields REITs were offering (6-7%), were not attractive for the investors as the banks are offering above 7%. Hence investors shied away from REITs which trigged a 15-20% fall across all three listed players.
However, this can be a short-term phenomenon. Once the interest rate starts to go down, we can see a bump-up in REITs. If you have a long-term horizon and looking to build a REIT basket, this can be a good opportunity to accumulate slowly.
— Capitalmind (@capitalmind_in) November 21, 2022
Other relevant reading:
NOTE: This article is for informational purposes only and should not be considered as investment advice.
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