14 mn sq ft office parks make Brookfield REIT a long-term bet, say analysts

Pandemic-led growth challenges, higher debt and valuations could cap near-term gains

The Brookfield India Real Estate Investment Trust (REIT) is looking to generate steady yields from its 14 million square feet of office parks located across Mumbai, Noida, and Gurugram. 

Sponsored by a Brookfield Asset Management affiliate, the company seeks to generate a yield of 7.95 per cent in FY22 and 8.43 per cent in FY23.  

To do this, the company is banking on annual revenue growth (net operating income) at just under 10 per cent over the FY21-FY23 period, with the current financial year reporting flat growth.  

The growth is on the back of strong demand from its  multinational client base, higher occupancies, long lease period (with average of 7 years), and contracted lease escalations. Rents are over a third lower than the market rates, which offers an upside when leases expire. 

Upgradation and development are other avenues for revenue growth. While there is strong growth potential for Grade A commercial properties (given the limited supply and ongoing offshoring trends), the company could face some headwinds on account of the shift to work-from-home and hybrid models that technology majors are experimenting with. This could lead to pressure on the overall lease market as well as rentals. 

Given the higher debt on its books and interest costs, financials — especially the bottom line — has not been consistent. While revenues have grown 8 per cent annually over FY18-20 to Rs 957 crore, it reported a loss in FY19, while net profit for FY20 was Rs 15 crore. The IPO, however, could help pare debt as the firm seeks to use the proceeds to reduce debt by Rs 3,575 crore. 

Given the headwinds, Angel Broking is neutral on the issue as they believe the yields projected are aggressive and difficult to achieve. “Due to uncertainties around Covid-19 and proliferation of work-from-home, we expect demand for commercial real estate to be muted,” they add. 

Vikas Jain of Reliance Securities, however, recommends investors to subscribe from a long-term perspective, citing the Rs 1,140 crore free cash flows over FY18-H1FY21. 

On Wednesday, the IPO was subscribed 11 per cent. A day earlier, the firm had allotted shares worth Rs 1,710 crore to anchor investors at Rs 275 per unit. The IPO comprises Rs 3,800 crore of fresh fund raise and no secondary share sale. 

The IPO closes on Friday. This is the third Reit IPO in the domestic market after Embassy REIT in 2019 and Mindspace REIT in 2020.