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17 May 2022, Edition - 2499, Tuesday

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India’s first REIT IPO opens for subscription today; should you invest?



India’s first Real Estate Investment Trust (REIT)-launched by Embassy Office Parks, a Bengaluru-based real estate developer and backed by global investment firm Blackstone-finally hit the primary market on Monday to raise Rs 4,750 crore. Available in the price band of Rs 299-300 per unit, the minimum bid to apply for the IPO is 800 units. That said, an investor will have to invest at least Rs 2.4 lakh in this product. Thereafter, one can increase the lot size in multiples of 400 units.

The Embassy REIT raised Rs 1,743 crore from anchor investors on Friday. The issue is open for subscription until March 20.

What is REIT?

For uninitiated, a REIT is a company that owns, operates or finances income-producing real estate. Modelled after mutual funds, REITs provide all investors the chance to own valuable real estate, and earn dividend-based income and total returns.

Market regulator Sebi had first issued the REIT regulations in 2014, paving the way for this globally popular product to take off in the Indian market. However, it is only in 2017 that India-based Embassy Group and US-based Blackstone group registered India’s first REIT in 2017. They filed for the IPO in September last year.

Earlier this month, Sebi proposed to reduce the minimum subscription amount to REITs to Rs 50,000 from Rs 2 lakh earlier. Since, Blackstone-Embassy REIT was registered before the revised regulations came out, the minimum investment stands above Rs 2 lakh.

Exerts on REIT IPO

As per the red-herring prospectus, Embassy Office Parks posted consistent revenue growth in the last 3 years from Rs 1,575 crore in FY16 to Rs 1,766 crore in FY18. The Embassy REIT has been given a long-term rating of [ICRA] AAA by ICRA.

Experts believe as REITs are required to distribute at least 90 per cent of their taxable income to shareholders annually in the form of dividends-which is tax free in the hands of investors-investment in REITs makes sense.

“The high quality ‘best in its class’ commercial asset portfolio offers investors healthy post tax returns of nearly 6.5-7 per cent per annum with further potential upside on account of capital appreciation over a five-year projected period. The investment offers superior returns over traditional debt allocation and lower volatility over public equities, making this a compelling investing proposition. Hence, we recommend ‘subscribe’ this issue for long term,” says a report by PCG Research.

Shobhit Agarwal, MD & CEO, ANAROCK Capital although projects 14 per cent returns on commercial assets over the next five years, he cautioned India’s REIT environment is not really a faithful emulation of that of developed international markets like Singapore, UK, Canada and Australia.

“Once REITs become an on-ground reality, the market must remain vigilant. There could be a major issue for Indian REITs 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 pointed out.

Meanwhile, investors must keep in mind that the actual return on REIT will be calculated only after taking into account the taxes. Individual income tax slabs, holding period, and other sources of income will also have a role to play. As the minimum investment amount is quite high, the REIT IPO appears to be a product meant for high-net worth individuals looking for diversification and liquidity.

“Their comparatively low correlation with other assets makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns. The greatest advantage offered by such investments in liquidity, that is otherwise not available in real estate investments,” says PCG Research report.

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