This trend is somewhat similar to REITS in Singapore. There are a dozen-plus popular REITS listed on the Singapore market and the performance of healthcare, logistics and industrial infrastructure REITS have outperformed Retail and residential REITS.
In the India REIT space, I have a positive bias towards Brookfield given its parentage and legacy. My view is that REITS are good for someone who already has a good part of their net worth in common stocks and are under-allocated in real estate.
Disclosure: Recently invested in both Embassy and Brookfield.
Yup. Specialty REITs in Healthcare and industrial were trading above their NAVs too. I really hope we see REITs in these sectors in the near future. Anything with data centers and storage would be fantastic too. Iāve looked up possible REITs over the next few years and the only ones I could find were Prestige, RMZ and Panchshil could be next all of which are into commerical offices. Are there any private REITs in india in the data center, storage, healthcare and industrial /other specialty domains that could be options over the next few years? One of the main reasons I am SIPing into REITs right now and not just buying a lumpsum is since I suspect there will be a lot more options thrown at us in the near future so creating a basket in the long run with exposure to other sectors too will be a good way to de risk an already low risk asset further.
Note that while Office REITs trade at discounts compared to specialty REITs they have still performed well if bought on huge drawdowns and give a higher yield too and are in no way bad options.
However, buying them at near or around NAV has led to slow capital appreciation. So historically buying Office based REITs at discounts to NAV when interest rates rise and buying specialty REITs anytime during a year in and around NAV looks like it has worked. The beauty is we always have NAV to go by(while not accurate gives a good indicator) which makes this asset very easy to invest in
Excerpt from the article :
"Real Estate Investment Trusts, also known as REITs, are attracting quite a bit of attention lately from Indian investors, who have a known fetish for real estate. Can REITs deliver land-like capital gains, while saving us of the concentration risks and the high maintenance required in property investments? Can they substitute for equities or mutual funds in oneās portfolio, in terms of wealth creation?
The answer in short is no, but this product has other uses. REITs are hybrid assets that cannot substitute for either equities or property in your portfolio. Yes, they can be acquired in byte-sized lots like shares and offer far better divisibility and liquidity than real estate. But their very structure makes them more suitable for regular income generation than outsized capital gains.
Now that three REITs have successfully completed IPOs and now trade on the stock exchanges ā Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust ā hereās a deep-dive into why we think REITs ought to only occupy a place between stocks and bonds in your portfolio."
Any idea about how the proportion of tax free distribution is arrived at? Can biret increase their percentage of tax free distribution in the years ahead ( much more than the 20 expected in the report)
I am asking this for the long term.
Iāve gone through the Brookfield RHP a couple of times now and can nowhere find the potential break-up of NDCF into dividend, interest and principal repayment.
All I could find is this:
āOver the Projections Period, the Brookfield India REIT is estimated to receive cash flows from the SPVs through a combination of interest income on Shareholder Debt and CCDs, repayment of principal on Shareholder Debt, and dividends. These cash flows will contribute to the NDCF, net of REIT level expenses.ā
Iām not sure how ICICI have calculated the estimated break-up. Also, Embassy REITās recent holding structure changes shows that it is possible to maximize tax free distributions.
Personally, would be quite disappointed if the tax free distribution is only 20% of the overall distribution as Mindspace has 90% tax exempt distribution and Embassy should have close to 75% soon.
I suppose the best way to find out is during Q4 results call whenever it is announced.
Why is Mind space trading at the least discount to NAV.
Is it purely because of highest Tax free distribution as compared to the other 2 REITs or is it because of having 40% exposure to a great location in Hyderabad which has a good chance of appreciation.
Mind space Yield is around 6.25
Embassy around 6.8
Biret around 6.3
Assuming 30% tax rate and 75% tax free distribution for Embassy, 0% tax free distribution for biret and 90% for mindspace.
Maybe you can think on the lines of who are the sponsors of each - Embassy, Mindspace and Brookfield. Which Real estate builder is involved apart from the exit seeking PEs
A good read and shows that over longer term reit index has generated a delta of 1.5% over s&p 500
A quote which I liked :
I would end this article by noting that, especially today, it makes much more sense to invest in REITs because they remain discounted even as the housing market is red hot. Money is made at the acquisition and today, you will find much better deals in the publicly traded REIT market.
While I agree globally REITs have done really well, in India REITs are not about housing market but currently about commercial real estate. Also housing market is not red hot as far as I am aware with many properties selling/reselling lesser than what esteemed builders sold them at launch 10 years back in most tier 1 citiesā¦there has been almost a decade of stagnation in housing and considering cost of acquisition, housing has been a losing proposition. Commercial real estate - I am not that well aware of but I am sure they can also see stagnation for long time like housing (not mean now, but anytime based on their own dynamics)ā¦but thatās part and parcel of every business and here comes management capabilities to handle and grow during such timesā¦
From recent concall of Embassy it is very clear that there will be shortage of A grade commercial properties in next 2-3 years. When it comes to commercial real estate value whether it will remain stagnant or below current prices in coming years, I have no idea about that but as there will be shortage it should not go down.
My investment thesis is based more on a borader view of office rental properties ( Grade A ) doing well over a decade or so. Till the time they have rental escalation contracts in place and occupancy levels are north of 90%, Iām not much concerned about their real estate value till the time it doesnāt go below their buying price.
Its more like buying an annuity plan where your principal doesnāt grow but your current needs are met and in REITās case the dividend yield might go up as well with better acquisitions.
Off topic : housing market luxury projects might be selling below builders price but in South Mumbai where I stay either prices are way above it was quite a few years ago for ready to move in properties which are not luxury but well managed gated societies.
Mindspace REIT just reported a decent Q4 performance along similar lines of Embassy.
Some highlights and comments from press release:
Rs. 4.81 DPU comprising Rs. 4.44 tax free dividend translating to ~6.15% tax free yield and overall yield of 6.6% at CMP. Compares very favorably with Invit investments at 9.5-10% taxable yield for investors in 30% tax bracket
Leased c.0.63 msf to one of Asiaās leading data centre operators at Mindspace, Airoli West
Portfolio size has now increased from 29.5 msf to 30.2 msf
Continued to collect over 99% of Gross Contracted Rentals
Committed Occupancy of 84.2%
Average cost of debt at 7.1% at March 31, 2021
Robust balance sheet with low net debt to market value of 14.0%
NAV of INR 345.2 p.u. as of 31 March 2021 vs INR 338.4 as of 30 September 202
While analysing debt of a REIT, there are two things to consider :
External Debt
Internal Debt provided by REIT to project SPVs
To know whether the management is using its debt efficiently, I track -
a. External Debt / NOI <= 5 (NOI is Total Operating income - Total Operating Expense; both adjusted for onetime items). As long as it is less than 5, the debt is sustainable. Only exception is if there is a sudden bullet repayment or sudden fall in NOI
b. A low External Debt / NOI implies that the REIT can still lever up and increase its equity returns
c. Also as an investor, ideally the cost of external debt should be less than the yield you are buying. Makes little sense to take more risk than debt holders for lower returns (Note this metric has no bearing on operational / financial stability of the REIT. This is oriented for investors as a benchmark)
Coming to internal debt -
d. I would want the management to use this as efficiently as possible to upstream the cash with minimal tax leakages
I personally believe the metrics of Debt/Market Cap or Debt/NAV holds limited value. Both Market Cap/NAV are determined by the Market/Valuers and do not indicate the ability of asset to repay.
Would you also factor in NOI / yield growth in above equation or only considering current yields? Mindspace yield of 6.6% vs cost of debt at 7.1% doesnāt tick the box then and also when Embassy REIT came out with IPO a couple of years back, the yield was definitely lower than cost of external debt which was north of 8%.
I think like any project, we need to look in expected cashflow over life of assets. Current yield would be indication of current yielding capacity of the assets. Over 40-50 years life of assets, the rent would increase with inflation and hence current yield in future years would increase with time. The assets cashflow when discounted with WACC (say 8-9%) results in positive net present value, would be accretive to investors.
Current yield on REIT assets is like Dividend yield in very crude form. If current Sensex dividend yield is around 2%, and expected return for investor is say 14%, it would not be correct to reject investment, as there is scope for capital appreciation which can provide for deficit in return expectation.
While REIT has element of return coming as capital return (to which extent yield are overstated as compared with Dividend yield of equity); being Hybrid, REIT is cashflow based product with moderate inflation protection in business being available to investor. If manager, over period, with judicious mix of debt, can acquire more assets, it can provide growth for area under lease along with appreciation in lease rentals and property value change over life of assets.
In nutshell, while it is good to compare current yield, one has also to consider potential for growth in income from lease rental revision, scope for increase in underlying assets value and prospect of new assets acquisition (at correct price) along with funding of same (issue of new units to investor/ debt or NCD which may have bullet payment, increasing distribution in initial years). Current yield would simply the evaluation, but other factors are equally important to be evaluated by investor in my opinion.
Yes - while considering the return for a REIT both the yield and rental escalation has to be considered. I missed explicitly mentioning this in my previous post.
