India launched its first REIT IPO today, should you invest?
The Blackstone-backed Embassy Group’s offering has potential but comes with caveats
Indian investors will witness a first-of-its-kind IPO today as the country’s first REIT (Real estate investment trust) hit the primary market. The REIT is a joint venture of private equity giant Blackstone Group and Bengaluru-based real-estate developer Embassy Group and is officially called the Embassy Office Parks REIT.
But what exactly makes this IPO stand out from the others? More importantly, is it worth putting your money in?
What is a REIT?
A REIT is similar to a mutual fund in that they pool money and invest in income-generating assets. But what makes REIT different from mutual funds is that it only invests in large-scale real-estate projects such as office buildings, hotels, warehouses, and apartments.
So basically, REITs are linked to real-estate and can be traded on the stock exchange.
In a REIT, investors make returns on their investment based on the yield. This yield is driven by the profit made by the real-estate property and an increase in the asset’s value.
Simply put, your REIT units give you a regular dividend which is determined by the profit the property makes.
Real-estate is a high-ticket investment and hence always a deterrent for the retail investors. Now, with the introduction of REIT, these instruments allow investors to invest in high-end commercial real-estate without physically owning it.
What is included in this Embassy Office Parks REIT?
The REIT’s portfolio comprises of close to 33 million sq. ft of office space which is spread out across the cities of Pune, Mumbai, Bengaluru, and Noida. It also includes the famous Express Towers ( at Nariman Point) and First International Finance Centre (in the Bandra-Kurla complex).
The trust plans to raise Rs.4,750 crore (making it the largest public offering for this year) through the sale of close to 15.83 crore units at Rs.299–300 per unit, of which 12.9 crore units are assigned for public investors while the rest will be offered to strategic investors.
The minimum lot size is 800 units, beyond which the investor can buy in multiples of 400. This means that an investor must make a minimum investment of about Rs.2.4 lakh.
On 1st March 2019, the minimum investment criteria was lowered by the SEBI to Rs.50,000 from Rs.2 lakh earlier. Since Embassy Office Parks REIT IPO was filed in September last year, it is still subject to the old specifications.
The IPO will remain open till March 20. The funds raised through this IPO will be utilized primarily for repayment of Embassy’s debt, which currently stands at Rs.8554 crores.
What are the pros and cons of investing in this REIT?
As this is the first REIT in India and fund houses do not have historical data, they are reluctant to suggest this as an investment option for retail investors. But if this REIT is successful, various others may follow soon and this will provide a fund-raising option for the struggling property companies.
Pros
- This is the first time retail investors get to enter the real-estate sector and own physical assets.
- The returns on commercial properties range between 8–10% and commercial spaces in premier locations provide higher returns. The Embassy Office Parks REIT is expected to provide a return of about 8.25% to 8.28%.
“Investment in commercial real estate is a highly capital-intensive affair. REITs are a very viable addition to investment portfolios as they allow investors to participate in an asset class previously reserved only for the affluent few,”
- Shobhit Agarwal, managing director and chief executive officer, Anarock Property Consultants Pvt. Ltd.
Cons
- The entry point of Rs. 2.4 lakhs is huge.
- Nearly 60% of their properties lie in Bangalore alone, which can carry a geographical risk.
- Returns come to investors who are willing to stay for the long boom/bust cycles that the industry is known for.
“There are likely to be some teething trouble initially; so we would suggest that investors wait before investing in it,”
- Lovaii Navlakhi, managing director and chief executive officer, International Money Matters Pvt. Ltd.
Minance’s Opinion
The REIT is a first-of-its-kind investment option and also an innovative way to raise money. If you are willing to stick through 5–7 years and confident about Bangalore’s real-estate scene, this investment might make sense. However, if you are simply looking to make FD beating gains, there are other investment options out there.
Minance recommends skipping this IPO, you can always invest in it later and there will be other REITs to follow.
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