Mindspace REIT : Should You Invest?

Real Estate Investment Trust (REIT)/ Infrastructure Investment Trust (InvIT) is a tax-efficient entity that owns a portfolio of income-generating real estate/infrastructure assets. These trusts, like mutual funds, issue units against assets held.

Mindspace from Raheja group is the second company to come up with a REIT after the Embassy.

• Issue Opens on July 25
• Priced at Rs 275
• FY21 Yield of 7.1%
• FY22E Yield of 7.5%

We recommend as of now it is better to keep away from the REIT IPO as Embassy REIT is also languishing at a 30% discount due to the corona pandemic as companies are moving from office spaces to work from home culture.

Get intraday tips for Monday here and start generating profit on a daily basis.

A fresh perspective is placed below in the REITs

WHAT IS REIT?

REIT is Real Estate Investment Trust, is similar to Mutual Funds wherein the money is pooled and invested in Commercial Real Estate Assets. REITs earn rental income from their properties, which is distributed to the Unitholders.  So, while MF invest in Stocks, gold, bonds, etc, the underlying asset in REITs gets invested in actual physical Real Estate.

Exactly similar to a Mutual Fund, REIT too will have a Sponsor which establishes a Trust.

SO, HOW EXACTLY DOES A REIT WORK :

1. A REIT (like a Mutual fund) collects money from Investors.

2. These monies are invested across Rent Generating Properties.

3. The REIT collects the Rent

4. The REIT distributes the Rent to Investors via periodical Dividend.

5. The Capital Value is reflected in the NAV

Regulations in India mandate that these REITs have to pay out 90% of the distributable Cash Flows to the unit holders. And REITs are supposed to have minimum 80% in COMPLETED AND INCOME GENERATING real estate properties.

So, REITs allow lay investors to have exposure to High-Quality Rent Yielding properties which would otherwise be unaffordable.

Yes, REITs are also listed in Stock Markets and traded like any other Equity Shares and hence have no liquidity issues which a typical Real Estate will face.

SEBI came out with list of DOs and DONTs for REITs way back in 2014 and in US, REITs are in vogue for quite a long time and more than 300 are registered and about 40,000 commercial Properties in the US are owned by REITs!!

This is the 2nd REIT issue to hit the Indian Markets after Embassy Office Parks. BTW, Blackstone is the investor even in Embassy REITs.

Despite subdued equity markets, Embassy REIT fetched a return of 25% over the last one year

“Embassy REIT distributed ₹18.8 billion to investors for its first year as a listed REIT. That is a dividend yield of 8.1%," said a person close to Blackstone.

MINDSPACE BACKGROUND:

Mindspace Business Parks REIT is backed by the K.Raheja Corp group and Blackstone.

It owns top quality office space portfolio located across Mumbai, Hyderabad, Pune, Chennai, etc.

The Total Leasable Area of Mindspace Business Parks is 29.5 million sq feet, easily one of the largest Grade-A office portfolios in India.

Company Portfolio has 5 integrated business parks with superior infrastructure and amenities (such as restaurants, crèches and outdoor sports arenas) and 5 quality independent offices. Some of its properties include Mindspace, Inorbit Mall, The Square, Commerzone.

Of these 29million sq feet, already 23 million sq ft are completed, leased out and yielding rent.

Approx. 85% of its Gross Contracted Rentals are derived from Multinational companies and nearly 40% from Fortune 500 Companies.  Some of the tenants of the company include mix of top class multinational and Indian companies namely Accenture, Qualcomm, Barclays, JP Morgan, UBS, Facebook, Capgemini and Amazon.

Mindspace Business Parks REITs counts IT services firm Accenture as its biggest  tenant. Accenture accounts for 8.7% of Mindspace Business Parks’ annual rental income, occupying 1.9 million sq. ft of office space

WHATS GOOD ABOUT THE ISSUE

1. Owning a Real Estate is a challenge both financially and legal hassles, REITS is an easy simplified asset class to own the same without owning it Physically.

2. No Lock-In: You as Investor can enter or exit the REIT as per your wish and convenience unlike an actual Real Estate which has its own problems. You can even sell the REITS in the Stock Markets making it very liquid. The REITs will be listed on both the NSE AND BSE

3. Best way to have exposure to Real Estate. Affordable as you can buy a fraction of the property by buying just a few units

4. In addition to the Dividend returns, there is scope for Capital Appreciation which will be captured in the price of the listed unit of the REIT.

5 . Since REITs are mandated to distribute 90% of the surplus distributable Cash Flow, in form of dividends there is a good scope for Regular Income.

6. Real Estate is one of the Most non-transparent asset class and REIT aims to reduce that as it is regulated by SEBI and will be managed by Professional Managers (just like Mutual Funds)

7. DEBT ALTERNATIVE: A good alternative to Fixed Deposits and Bonds as the returns in REITS are more or less assured due to regular rents.

8. GEOGRAPHICAL DIVERSIFICATION TOO: Since REITS will be investing in Different Geographical locations and mostly in Rental generating assets, it offers Investors a Good Diversification Option.

WHAT EXPERTS SAY:

REITs attractive  that in addition to the 7% dividend returns, there is good scope for Capital growth giving a potential DOUBLE DIGIT returns over 3-5 years period

Once the reduction in Interest rates playing out, an investor can expect up to 11-14% returns over three-five years,"

Mindspace has indicated that it is expecting a good 10.6% growth in Revenue this fiscal (and this is post Covid pandemic disruption)

“Typically, commercial leases are six to nine years long or more, with a rent escalation clause. This makes REITs less volatile than other investment avenues,"

SHOULD YOU INVEST?

Investing in REIT is like investing in a combo of Equity and Fixed income.

Though it has more or less a stable return in form of regular dividends, it also has price volatility in stock markets too.

In fact, in the US, the REITs have been MORE CONSISTENT in delivering top performance than even the S&P 500.

The records show that in the US and other developed markets, investors invest in REITs not to beat the Stock Market but for regular income as by Law, REITs have to mandatorily pay out at least 90% of their net earnings as Dividends.

REITs, although listed, do not always move in the same direction as the stock market as the under lying asset is Commercial Real Estate and thus provides Good Diversification.

The FTSE NAREIT All Equity REITs index has outperformed the S&P 500 by more than 1% per year over 47 year period of May 1972 to Dec 2019.

In fact, post lockdown, Mindspace has actually leased out FRESH 0.7msf area across various properties and the weighted average rent achieved was ACTUALLY HIGHER than the Market rents in the area.

According to a July 6 report by property consultant firm Anarock, at 14% return on investment (ROI), India REITs outperformed BSE Realty Index.

Investors need to treat REITs as income-generating assets, which can deliver slightly higher returns than fixed deposits over the long term.

Mindspace REITs unit's NAV as on 31.03.20 stood at Rs. 319.50. On this basis, the issue is priced at a P/BV of 0.86 and the issue is offered at 275 levels.

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.

Investors looking at REITS for a longer time frame of 5-7 year plus and more as a Diversification tool can consider going for it.

TAX ANGLE:

1. Dividends were supposed to be TAXED IN THE HANDS OF THE INVESTORS but later a change in the Finance Bill 2020 was announced post COVID outbreak wherein DIVIDENDS EARNED FROM REITs WILL BE EXEMPT IN THE HANDS OF THE UNITHOLDERS.

2. Short Term Tax (sold within 3 years) is 15% of Gains

3. Long term tax (sold AFTER 3 years) will be at 10% of Gains.

4. Dividends received will be ADDED TO THE INCOME OF INVESTOR AND SHALL BE CHARGED TO TAXED AS INTEREST INCOME

Point No. 1 The amendment, however, clarifies that the DDT the exemption will be given only for the companies which have not migrated to the new corporate tax regime.