Improved REIT rules, but analysts still cautious

DLF, Prestige have the largest commercial portfolios among listed entities but no immediate gains

The key beneficiaries of the relaxation in real estate investment trust (REIT) rules, in the listed realty space, would be developers who have a large portfolio of commercial assets such as DLF, Phoenix Mills, Prestige Estates and Oberoi Realty.

The Securities and Exchange Board of India approved certain amendments for REITs proposed in the consultation paper released in June. These include more sponsors for a REIT, doubling exposure to 20 per cent in under-construction projects, and investment flexibility for SPVs.

RMZ Corp - backed by Qatar Investment Authority - and private equity major Blackstone with its partners Embassy and Panchshil are in the process of listing their REITs and expected to raise about Rs 7,000-7,500 crore in the next six months.

However, Samar Sarda of Kotak Institutional Equities believes most listed developers holding rental assets are likely to list in the next round, as they are currently under stake sale, restructuring and building mode to achieve greater scale.

An analyst at a domestic brokerage says, the PE-backed developers need an exit and thus will be among the first to hit the market. The listed players, according to him, will wait for the right time and good valuations to tap the REIT space. Given the higher yields from these rent producing assets, foreign investors are expected to be big buyers. Among key players, DLF has rental assets of 30 million sq ft (MSF) while Blackstone has 32 MSF.

For publicly-listed entities such as Prestige, which saw demand weaken in its core Bengaluru market, a listing of its commercial portfolio would be a key trigger. Fewer new launches could also mean pressure on its cash flow. Prestige’s leverage is already above 1.1 times (more than its guidance of 0.75-0.85 times). Analysts at HSBC say, REITs can be an upside trigger, but believe this is still far away. The stock, which ran up 22 per cent in the last three weeks on REIT listing and its plan to raise Rs 2,000 crore by selling stake in its commercial assets, fell 8 per cent on Monday on profit-booking. Prestige has operating commercial assets of about 11 MSF.

For DLF, the sale of promoter stake in DLF Cyber City Developers (DCCDL) to investors and easing of REIT norms have been key positive triggers (its stock was up 50 per cent in six months). However, the DCCDL transaction will not result in any cash flow and the potential REIT listing is some time away. DLF’s high debt levels and sluggish demand in its core National Capital Region market remain key hurdles.

Overall, REITs is positive, but most analysts are still cautious on realty firms, given the slowdown in residential portfolio and lack of near-term triggers.