Mint, Mar 19, 2019
• Embassy REIT has a good quality underlying office portfolio with reasonable net distributable cash flow projections stemming from in-line occupancy and rental forecasts
• ICRA has assigned provisional credit rating of AAA (stable) for Embassy Office Parks REIT, considering a consolidated view of the REIT along with the asset-owning SPVs proposed to be acquired by it
India’s first REIT—Embassy Office Parks REIT—is open for investment till 20 March. Embassy Office Parks is a Bengaluru-based real estate developer and the REIT is backed by the Blackstone Group LP, a global private equity firm. The Embassy Office Parks REIT plans to raise ₹4,750 crore through the IPO. The per-unit price has been kept in the range of ₹299-300, with the minimum application bid of 800 units. Thereafter, one can increase the lot size in multiples of 400 units. Ashwini Kumar Sharma asked experts to share their views on whether it makes sense for an individual to invest in it
Rental yield attractive but risks almost similar to equity
—Atul Singh, chief executive officer, WGC Wealth Management
The Embassy REIT has a good quality underlying office portfolio with reasonable net distributable cash flow projections stemming from in-line occupancy and rental forecasts—particularly for the largest (accounting for almost 40% of NAV) asset, Embassy Manyata. While the purpose of the REIT is to raise funds for paying off the debt, the existing capital structure of the REIT stands at a debt/book equity of 2.2x, with debt outstanding pre-IPO at around ₹8,000 crore. There is around 3% exposure to solar assets and 5% to hotel assets—so 8% of the NAV won’t be truly office-linked yield. For the investment goal of periodical income, the REIT offers attractiveness, though the expected rate of return from capital appreciation remains subjective. In terms of the risk and returns, it offers attractive rental yield of about 8% with the associated holding ownership risks almost similar to equity. However, majority of the portfolio assets are in office space in Bengaluru, which has rapid offtake, and should minimize the blow, if any, in the event of adverse conditions.
Distribution of rental income, tax treatment still unclear
—Lovaii Navlakhi, managing director and chief executive officer, International Money Matters
It is a good way to get exposure to commercial real estate; the projects held are good and occupancy rate is high. However, the distribution of rental income is unclear; as well as the taxation treatment on the product. There is also a single tech park weightage of more than 40%, and as a financial planner, concentration risks need to be considered.
These are early days for REITs and previous experience with new products like InvITs have given negative returns. You could consider the minimum investment in case you wish to allocate some of your net worth to this category provided you have more to deploy in future REITs.
Every person’s risk appetite, time horizon and return expectations are different; so there cannot be a generic answer. Assuming there are no immediate large liquidity requirements, the asset class of real estate could have 20-40% of one’s net worth, excluding the home they live in. REITs would help in reducing the risk of a single asset investment as in real estate, and would be part of the overall real estate allocation.
Returns depend on ability to re-lease assets, growth in rentals
—Prateek Pant, head, products and solutions, Sanctum Wealth Management
We believe Embassy REIT has a marquee tenant base, is backed by strong sponsors and has quality assets with a potential for upside. We recommend it for long term investors (5-7 years) who are looking for yield generating assets and capital gain in the long run.
The current portfolio has 36.5% of the lease area expiring over the next five fiscal years. Given the strong fundamentals, the fund manager expects to add around ₹39.9 crore of additional rent over the three fiscal years due to the significant mark-to-market re-leasing opportunity at lease expiry. Embassy REIT is projected to deliver 10.7% growth in distributions over the projection period (FY 2019-2021). However, it is dependent on the REIT’s ability to successfully re-lease the assets, escalation in rentals and growth in commercial real estate. A significant portion of REIT’s revenues are derived from a limited number of large tenants, tenants in the technology sector and from a few integrated office parks. Any conditions that impact these tenants may adversely affect the business.
Volatility in demand-supply for commercial realty a concern
—Shubham Jain, vice-president and group head, corporate ratings, ICRA
ICRA has assigned provisional credit rating of AAA (stable) for Embassy Office Parks REIT, considering a consolidated view of the REIT along with the asset-owning special purpose vehicles (SPVs) proposed to be acquired by it. The REIT will own a large and diversified asset portfolio through its SPVs, spanning office parks, hotels and associated amenities. On an aggregate basis, the assets had a committed occupancy of 95% as on December 2018. The long-term nature of lease agreements in the office parks, with weighted average lease expiry of around seven years for the portfolio provides high revenue visibility. Growth prospects for the REIT are further supported by contracted escalation clauses in the lease agreements, potential for re-leasing at market rates on lease expiry, existing undeveloped land in the SPVs and potential acquisitions. Nonetheless, the REIT’s credit profile will be vulnerable to any volatility in the demand-supply scenario for commercial real estate, macroeconomic cycles, quality of its future acquisitions and its overall leverage levels.