Global investment giant Blackstone and Bangalore-based real estate developer Embassy launched India’s first real estate investment trust (REIT) i.e. Embassy Office Parks REIT (or ‘Embassy REIT’ hereon). While this may appear too precise to care, REITs offer a unique 'financial markets' avenue to gain exposure to real estate rather than requiring investors to buy physical assets. The 'financial markets' avenue makes them very interesting, especially in a post Demonetization/RERA era where buying property in the conventional way is something investors have had to hold back on.
REIT is a company (and an investment vehicle) that owns, operates, finances and manages 'income-generating real estate assets'. It is essentially a real estate company that offers common shares (called ‘units’) much like other listed companies, allowing investors to take an effective ownership in the business.
That being said, REITs have two unique characteristics which make this investment vehicle somewhat different. First, REITs own and manage income-generating properties. Second, REITs are mandated to distribute most of the cash flow it generates back to unit-holders.
The combined effect of these two characteristics mean investors gain exposure to real estate assets which generate income which in turn is distributed back to them. This is in addition to the upside potential of price appreciation. These advantages are heightened in the Indian context because of lack of meaningful alternatives.
SEBI requires REITs to distribute 90% of income earned back to investors making REITs a liquid and income-generating investment vehicle.
As per SEBI, 90% of Net Distributable Cash Flow (NDCF) is mandated to be returned to investors (or ‘unit-holders’) on a semi-annual basis. Also, in the case of an asset sale, 90% of sale proceeds are to be returned to investors.
Consequently, REITs offer regular income while also being fairly liquid on account of it being publicly traded in the financial market. The minimum investment requirement is INR2 lakh, which as such underlines a significantly lower entry barrier for an investor to gain exposure to the aforementioned sector.
Embassy REIT property portfolio consists of 33 million sq. ft making it the largest office portfolio in Asia.
As per the red-herring prospectus filing, Embassy REIT will raise over INR5,000 cr with an option to increase the fundraising by 20-25%. The REIT itself is expected to be listed sometime early next year.
Embassy REIT property portfolio consists of 33 million sq. ft across Mumbai, Pune, Bengaluru, and Noida in effect making it the largest office portfolio in Asia. The portfolio includes Blackstone’s own assets as well as those in partnership with Embassy Group and includes 11 assets: seven office parks and four commercial buildings. Of the 33 million sq. ft, 24 million sq. ft is completed and 95% leased.
While Embassy REIT marks the first REIT in India, REITs as an asset class have fairly robust presence in advanced markets including US, Canada, UK, and Asian markets such as Singapore and Hong Kong among others.
Real-estate is generally perceived to be a significant investment class in India however REITs have never made the cut. Somewhat lower yields and a real-estate market largely tainted with illiquidity and lofty levels of opaqueness have been key impeding factors. However, in more advanced markets, REITs are considered key investment vehicles on account of their earlier outlined benefits and also in injecting portfolio diversification. That being said, Embassy REIT now offers the first opportunity for Indian investors in this asset class and its multifarious advantages could possibly help it in gaining some sort of momentum. Embassy REIT marks the birth of a new asset class in India and such should be worth keeping a close eye on.
Other international funds have been betting on Indian commercial real estate as well – timing is hardly surprising.
While Embassy REIT is a clear bullish bet on Indian commercial real estate, it is not the only international player making such a bet. Singapore's sovereign wealth fund GIC invested Rs 9,000 crore in December 2017 in DLF – India’s largest realty firm. Notable global funds such as Canada Pension Plan Investment Board (CPPIB), Brookfield Asset Management, Ascendas and Qatar Investment Authority have all been making bets on the Indian commercial real estate segment, albeit without REIT offerings.
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