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Mindspace Business Parks REIT IPO affirms appetite for Indian commercial real estate among global investors

Mindspace Business Parks REIT IPO affirms appetite for Indian commercial real estate among global investors

Considering the response from strategic investors to the Mindspace REIT and high returns from the Embassy REIT, more players may be encouraged to come forward. There may be one more REIT launched by the end of the financial year, say real estate experts

Office REIT, Mindspace Business Parks

The Mindspace Business Parks REIT, backed by Mumbai-based real estate firm K Raheja Corp and private equity firm Blackstone, filed its final offer document with markets regulator Securities and Exchange Board of India (SEBI) on July 17 to launch its public issue to raise up to Rs 4,500 crore. This clearly affirms that there is still appetite among global investors for commercial real estate.

As per real estate experts, the ‘timing’ of the launch is perfect. Considering the response from strategic investors to the Mindspace REIT and high returns so far provided by the Embassy REIT that was launched in April 2019, more players would be encouraged to come forward. There could be one more REIT launched by the end of this financial year.

The returns too are expected to be very attractive in the context of the current moderating interest rates environment with added benefits of income tax. Dividend returns are expected to be around 7 percent in addition to capital growth, potentially giving double-digit overall returns over a three-five-year period, experts said.

“Every asset in the market is currently chasing a huge amount of liquidity. There is enough liquidity in the global market and India still remains very attractive.

The commercial office space story for India is still intact and returns are bound to be attractive. We would see one more REIT getting launched before the end of this financial year,” Anuj Puri, Chairman - ANAROCK property Consultants, told Moneycontrol.

The market cap of both K Raheja Corp and Blackstone REIT would be in excess of Rs 40,000 crore for a product that was launched only in 2019.

“The market cap for the Embassy Office Parks REIT would be around Rs 25000 that of K Raheja Corp would be around Rs 15,000 to Rs 16,000. This is healthy for commercial real estate and clearly indicates that there is a lot of appetite for the product in India,” he said.

It is important to note here that notwithstanding the lockdown and the pandemic, the listed commercial real estate players in the country have collected almost 97 percent of the rents in the April-June quarter. This indicates that the commercial real estate market continues to remain robust despite the focus on work-from-home and some reduction in commercial real estate footprint.

“Commercial leasing activity last year was around Rs 4 crore and this year new leasing is expected to be in the range of Rs 2.5 crore despite the lockdown,” Puri says, adding this accounts for almost 60 percent of leasing in 2019.

The launch of this REIT during the pandemic is interesting.

“It lends great credibility to the inherent demand and strong fundamentals of the Indian commercial office market, as well as REIT as an investment vehicle itself,” said Anurag Mathur, CEO, Savills India.

The dominant play of the services sector in India’s GDP is intrinsically linked to commercial real estate, which makes this investment product very attractive, he said.

“The returns are also expected to be very attractive in the context of the current moderating interest rates environment with added benefits of income tax. Dividend returns are expected to be around 7% in addition to capital growth, potentially giving double-digit overall returns over a three-five-year period. The growth of REITs in India represents institutionalisation of the commercial real estate segment and many large real estate developers are already exploring this option,” he said.

However, some experts are of the opinion that, while the launch could not have come at a better time and is suggestive of the fact that the commercial real estate market in India has matured, there could be a correction within three months of the end of the loan moratorium period.

“It is a smart move on the part of the company to go in for a listing while the markets are riding high and there is a deluge of foreign capital into the Indian stock market. Having said that, there may be significant financial stress in the Indian real estate ecosystem right after the RBI moratorium period ends and this pain may last until the second quarter of 2021,” says Anckur Srivasttava of GenReal Advisers.

The launch indicates the coming of age of Indian commercial real estate market story.

“It was a one REIT stock story until now. Launch of a REIT by one more player adds to the maturing of the commercial real estate listed space. With the REIT market deepening there are clearly more avenues for larger foreign institutional players like pension, retirement funds and insurance companies to deploy long-term capital in asset backed space instruments,” he said.

Who should invest? Long term investors and those seeking low beta stocks with moderate risk returns expectations over a period of time after taking into account the rental distribution returns and capital gains appreciation.

“Overall returns from Indian Reits are likely to be in the range of inflation plus 700-800 basis points at least over a 7 to 8 year period. Globally Reits are considered a very effective hedge against inflation over the mid to long term and we expect the same trend to be carried forward in India as well,” he adds.

The Mindspace REIT has received commitment worth Rs 1,125 crore from institutional investors including Capital Income Builder, American Funds Insurance Series – Capital Income Builder, Capital Group Capital Income Builder, Capital Group Capital Income Builder (Canada), American Funds Insurance Series – Global Small Capitalization Fund, GIC Private Limited (for and on behalf of Government of Singapore), GIC Private Limited (for and on behalf of The Monetary Authority of Singapore), Fidelity Central Investment Portfolios LLC among others, according to the Offer Document filed with SEBI.

Total REIT units proposed to be subscribed by strategic investors will be 4.09 crore and will be allotted to them at Rs 275 per piece, according to the offer document.

Mindspace would be the second REIT to list on the India Stock Exchange. Embassy Office Parks REIT, where Blackstone is a shareholder, listed its units in April 2019, after an IPO where it raised Rs 4,750 crore. Blackstone owns around 15 percent in various special purpose vehicles (SPVs) that are part of the Mindspace REIT.

Mindspace Business Parks REIT filed its draft offer document on December 31, 2019. It filed its addendum on June 25, 2020. The REIT sponsored by K Raheja Corp has 29.5 million square feet leasable area spread across Mumbai, Pune, Hyderabad and Chennai with a market value of Rs 236,751 million.

The Business Parks in the Mumbai Region include Mindspace Airoli East Business Park, Mindspace Airoli West Business Park, Paradigm Mindspace Malad and The Square, BKC(2). The office parks in Hyderabad are Mindspace Madhapur and Mindspace Pocharam. In Pune, the properties include Commerzone Yerwada Business Park, Gera Commerzone Kharadi Business Park and The Square, Nagar Road. The Chennai property is Commerzone Porur, the offer document said.

REITs are listed entities that invest in income-generating properties and distribute at least 90 percent of their income proceeds to unit-holders through dividends. After registration with SEBI, units of REITs will have to be mandatorily listed on exchanges and traded like securities.

SEBI notified REIT's regulations in 2014, allowing setting up and listing of such trusts, which are popular in some advanced markets.

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