“Embassy REIT” is India’s first Real Estate Investment Trust (REIT). It’s IPO has been issued on 18th-Mar’19, and will remain open till 20th-Mar’19. Through this IPO, Embassy REIT wants to raise capital worth Rs.47,500 million (Rs.4,750 Crore).
I have already written few basics about REIT. I’ll suggest you to give a glance on it as well after reading this article. It will give you more clarity about REITs.
After the IPO closes on 20th-Mar’19, shares of Embassy REIT will be listed in India’s stock exchanges (NSE and BSE). But this listing, and onward trading of its shares is expected to begin only in second half of April’19.
Though the current IPO is open for subscription even for retail investors, but a minimum investment cap has been kept. How?
One can subscribe to the IPO only if one can buy a minimum of 800 units.
Each unit of IPO is priced at a minimum price of Rs.299. Hence a subscription of 800 units means a minimum investment of Rs.2.393 Lakhs (800 x 299). This means that a major chunk of the middle-class population may not even opt for the IPO subscription.
But in some ways this limitation was required for India. Why? Because this is the first REIT and hence the government wants to tread safely.
Nevertheless, Embassy REIT will finally be available for trading in secondary market from April’19 onwards. Hence, investors can get their hands on its shares from April’19 onwards.
But my guess is, by that time the valuation of shares of REIT will already become slightly overvalued.
What is Embassy REIT?
Embassy REIT is a company which owns and operates real estate properties. Before Embassy REIT was formed, these real estate properties were owned by Embassy group operating under the brand name of “Embassy Office Parks”.
Owning Embassy REITs shares is like owning a proportionate claim in the “company’s” profits.
How Embassy REIT generates its income & profits? Through income-producing real estate properties that they own.
Embassy Office Parks (EOP), which is the designated “Manager” of Embassy REITS, owns high quality “office spaces” in India. They own several such office spaces in Bangalore, Pune, Mumbai, and Noida. All these office properties makes up their ‘asset portfolio’.
The office spaces offered by Embassy Office Spaces are generally taken on rent/lease by Multinational Companies (MNCs). Names of few companies who have rent/leased the properties of Embassy in India are:
- PwC etc.
How Embassy REIT makes money?
The commercial real estate properties developed by Embassy Office Spaces are its assets. These properties generates income in form of rents or lease.
Embassy Office Parks has decided to “club its assets” and list these as “Embassy REIT” in Indian stock market (BSE and NSE).
Few Examples of assets (properties) developed and managed by Embassy Office Space, and is attached with the REIT, are as below:
All the above office spaces and its amenities generate revenue for “Embassy Office ParkS (EOP)”.
What makes Embassy REIT unique in India?
These are the following characteristics which makes Embassy REIT unique. Due to this uniqueness, there are high chances that this REIT will be loved by investors in India.
- Its India’s first REIT.
- The Embassy group has India’s ‘largest office space’ portfolio.
- Quality of Embassy’s offered office space is a benchmark in its sector.
- Demand for such premium office spaces will only grow in India in times to come.
- Embassy REIT has a “high-quality tenants base”.
What is the significance of high quality tenants?
Revenue of REIT will be mainly Rental income. The rents will be paid by the tenants who occupy the office space for their business use.
If these tenants are global giants like IBM, Microsoft, Google, JP Morgan, and other Fortune 500 companies, then future income of REIT becomes very secure.
Lets look at the general profile of tenants of Embassy REIT in India:
Total Number of Tenants of Embassy Office Space in India: 160+ numbers:
- 80.4% are MNCs
- 43.4% are Fortune 500 Companies.
- Average Lease length is 7.0 Years.
- Occupancy Rate is 95%+
Who should invest in REIT?
REIT is one of the better investment option for income generation. Though it is equity, but its potential to generate regular income is what makes it useful also for the income-investors.
Moreover, as per the following guidelines of the Government of India, REIT further becomes an ideal regular income generator:
- 80% or more of REIT’s asset holdings should be in completed properties which generates regular income in form of rent or long term lease.
- 20% or less of REIT’s asset holdings should be in under-construction properties, or in such properties which are though complete, but are not generating any rent/lease income.
- 51% or more of all the revenues earned by REIT must comes in the form of rents or long term lease.
What is the meaning of these regulations set by the government on Real Estate Investment Trusts? The meaning is simple, investors funds should be mainly used by REIT’s to generate regular income.
Under no circumstance, the priority of income generation shall be compromised by REIT in India.
How REIT can make money for its investors?
REIT can make money for its investors in two ways:
- Dividends: The rental/lease income so generated by the REIT will be distributed among the shareholders in form of dividends. The dividend distribution frequency can be monthly/quarterly/annually as applicable.
- Price Appreciation: Shares of REIT will be listed in Indian stock market. Hence the share price of REIT will follow its own course. When business fundamentals of REIT will improve, its market price will also grow (like any other listed company). When shares price has appreciated as desired, shareholders can sell their units and book profits.
Expected Returns from REITs in India
On an average it has been estimated by experts that, at current price levels (Rs.300 per share), REIT can start yielding dividends of around 7.0% immediately.
Generally speaking, rental yield of office spaces increase at an average rate of 4.5% in India. This means that, in years to come, the current dividend yield of 7.0% may grow at rate of 4.5%.
How does this growth rate of 4.5% effects the future yield of REIT in India?
|Description||Yield growth @ 4.5% p.a.|
|After 5 Years||8.7%|
|After 10 Years||10.9%|
|After 15 Years||13.50%|
As REITs are listed in stock market, they will also see a price appreciation. This price appreciation will be dependent on the business fundamentals of the company.
I have noted few fundamentals of Embassy REIT as listed in their offer document. These are the numbers of Mar’16 and Mar’18:
- Net Profit Growth: In 3 years (between Mar’16 and Mar’18), net profit of Embassy Office Space has increased from Rs.93.1 Crore to Rs.256.8 Crore. This is a growth rate of 40% p.a. in 3 years.
- Asset Growth: In the same time period, the asset base has increased from Rs.10,544 Crore to Rs.13,515 Crore. This is a growth rate of 8.63% p.a. in 3 years.
- Net Cash from operations: In 3 years, operating cash flow of Embassy Office Space has increased from Rs.925.1 Crore to Rs.1250.7 Crore. This is a growth rate of 10.5% p.a. in 3 years.
With these kind of numbers working in favour of Embassy REIT, I personally think that in next 5 years, Embassy REIT stocks will give at least an average capital appreciation of 12% p.a.
Considering that, currently this is the only REIT in India, this growth rate can further improve.
REIT is a must for all investors. Embassy REIT is now in the market. I am sure more REIT’s launch in India are in the pipeline. Keep tracking their progress, and if possible try to grab them in IPO stage itself.
In USA and Europe, REIT has been in existence since decades. For people who does not have huge capital to buy a “brick and mortar” real estate property, can buy shares in REIT. Read More about REITs basics here…
Have a happy investing.