Bengaluru-based Embassy Property Developments Pvt Ltd, plans to raise Rs 4,750 crore from initial public offering (IPO) that opens today (March 18). The price band for the Embassy Office Parks REIT IPO is Rs 299-300 apiece.
The interest range for the issue could also widen to 9.5 – 9.75 per cent as the final pricing is yet to be fixed, reports suggest. On Friday, Embassy Office Parks Reit allotted units worth Rs 1,743 crore to anchor investors. The trust’s portfolio comprises about 33 million square feet of office space across four Indian cities, Bengaluru, Pune, Mumbai and Noida.
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On a fundamental basis, post utilisation of the IPO proceeds, total indebtedness of Embassy should be less than 15 per cent of Market Value initially, which compares favorably to key comparable office REITs in Asia and the 49 per cent regulatory limit, reports suggest.
"Contract revenues and re-leasing to existing tenants at market rents should see revenue from operations increase to 46.4% over FY20/ FY21. Due to significant mark-to-market re-leasing opportunity (29.3% area expiring over 4QFY19 –23) backed by strong fundamentals, Embassy expects additional rent of Rs 176 million over FY20-21," says a note from Motilal Oswal Securities.
Should you invest? Analysts say the offer is a good bet for investors who are looking for a safer investment option as compared to equities and an assured return over a two-three year period.
"The markets are on the cusp of a recovery and there are a number of mid-and small-caps that can offer higher return of around 20 per cent over the next few years. Embassy's REIT offer provides an alternative to bonds and fixed deposits by offering a better and an assured return, but may not find favour with equity investors who are willing to take risk for higher returns," says A K Prabhakar, head of research at IDBI Capital.
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However, the minimum investment in a REIT of Rs 2-lakh could be a deterrent, analysts say. As per as Sebi regulations, a REIT shall invest only in commercial real estate assets, either directly or through special purpose vehicles (SPVs). Income earned by REIT could be through rentals or capital gains or both, and it gets distributed to unitholders. A unit shall be as small as Rs 2 lakh.
To safeguard investors, the rules were amended and a clause added where at least 80 per cent of the value of the REIT assets is to be made in completed and revenue-generating properties, whereas the balance 20 per cent could be invested in under-construction projects.
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"India’s first REIT listing shall infuse further liquidity in commercial office space projects, Special Economic Zones (SEZs) and IT parks. It will benefit the developers, land bank owners along investment individuals who aren’t able to win a whole asset," said Parth Mehta, managing director at Paradigm Realty.
Realty stocks, however, paint a grim picture at the bourses. Over the past one year, the Nifty Realty index has underperformed by falling nearly 21 per cent as compared to 9.5 per cent rise in the Nifty50 index. Indiabulls Real Estate, Prestige Estates, Mahindra Lifespace Developers, Sobha, Brigade Enterprises and Oberoi Realty have slipped 11 per cent to 58 per cent during this period, ACE Equity data show.
A recent report by ANAROCK Capital pegs the five-year return from commercial real estate assets at 14 per cent, as compared to 10 per cent return in 2017 in Canada and around 8 per cent to 10 per cent in the United Kingdom (UK).
“In India, the projected five-year returns on commercial assets is an optimistic 14%, largely because Grade A commercial real estate has been on a protracted winning streak since 2017. Commercial real estate withstood the vagaries of the various reforms much better than the residential asset class,” says Shobhit Agarwal, MD & CEO – ANAROCK Capital.
He, however, cautions that once REITs become an on-ground reality, there could be a major issue if the supply of investment-grade office spaces does not keep pace with demand. "If it doesn't, we will see an asset bubble form in the short-to-mid-term," Agarwal says.