Embassy Office Parks REIT-India’s First REIT IPO

Over the last two decades, India has emerged as a leading services hub for global corporations due to its large talent pool and cost advantage for high value services. This, along with expansion of domestic companies, has resulted in robust demand for commercial office space and strong growth across India’s major office markets.Embassy Office Parks REIT is finally hitting the market on March 18th with plans to raise around Rs 4,750 crore in India’s first REIT listing.

What is Real Estate Investment Trust or REIT?

REITs (real estate investment trusts) allow individual investors to buy shares in commercial real estate portfolios that receive income from a variety of properties, including  hotels, apartment complexes, office buildings, retail centers, self-storage, data centers, healthcare facilities, infrastructure (e.g., fiber cables, cell towers and energy pipelines) etc.

REIT Working Model

Major Pros of Indian Real Estate Investment Trust

• High Growth Potential - Since India is a growing economy, there is a possibility of long term wealth creation
• Liquidity – You buy and sell them like stocks.
• Diversification – They have low correlation with other stocks and bonds.
• Transparency – They are regulated by the SEBI and require audited financial reports.
• Dividends – They provide a stable cash flow.
• Performance – They offer attractive risk-adjusted returns.

Major Risk Factors of Indian Real Estate Investment Trust

• Market Risk – They don’t guarantee a profit or ensure against losses.
• Recessions - Since the investment is fully real estate related, funds may not return decent profits during subdued market conditions. 

Why Embassy REIT Looks Promising? 

India is the sixth-largest and the fastest growing major economy in the world and has become a leading services hub for global corporates over the last 20 years. Multinational companies are attracted to a beneficial cost structure that is over 85% lower than in Tier II cities in United States, a large English speaking talent pool (0.9 million engineers and 0.9 million commerce graduates graduated from Indian colleges in 2017) and affordable and high quality office infrastructure at some of the lowest rents globally. 

With low unemployment and accelerating wage growth pressure in the United States, India’s cost competitive services sector is expected to grow at 8.9% in FY2019. As the owner of one of India’s largest Grade A office portfolios, Embassy REIT is in a prime position to continue to capitalize on this incredible growth story and the sustained demand from services sector tenants (71.9% of tenant base) for Grade A office space.

Know More About Embassy Office Parks

Embassy Office Parks are the owner of a high-quality office portfolio in India that serves as essential corporate infrastructure to multinational tenants and has significant embedded growth prospects. Their Portfolio comprises seven best-in-class office parks and four prime city-center office buildings totaling 32.6 msf as of March 31, 2018, with strategic amenities, including one operational and three under-construction hotels totaling 1,096 keys, food courts, employee transportation and childcare facilities. 

Embassy Office Parks have invested in amongst the highest quality assets in the best performing submarkets of India’s top office markets of Bengaluru, Pune, Mumbai and Noida. These markets have exhibited strong market dynamics with world leading absorption (from 2013 to Q1 2018) and constrained forecast supply resulting in high rent growth and low vacancy on average.

Embassy Office Parks own one of India’s largest office portfolios with approximately 81.4% of the Gross Rentals from our 160 marquee tenant base is contracted with leading multinational corporations and approximately 43.8% is contracted with Fortune 500 companies, such as JP Morgan, Google and Microsoft. They have high quality tenant base and long-term contracted rentals (weighted average lease length of 6.9 years) provides considerable stability to its portfolio. 

Embassy Office Parks are well positioned to achieve further organic growth through a combination of contracted revenue, re-leasing at market rents lease-up of vacant space and new construction within the Portfolio to accommodate tenant expansion. Portfolio revenue from operations is projected to grow by 54.3% over the Projections Period primarily due to these factors. 

Below are the major highlights from their red prospectus

1. Revenue grown from operations by 15.4% over FY2016 to FY2018.
2. Leased 5.3 msf of total office space and achieved average re-leasing spreads of 47.4% on approximately 1.9 msf of re-leased space.
3. Achieved a 86.3% tenant retention rate, with 6.8 msf of office space renewed (including exercise of renewal options), without incurring material tenant improvement capital expenditure.
4. Demonstrated a 7.1% Same-Store Rental CAGR across the Portfolio Assets and the Portfolio Investment, over FY2016 to FY2018, by attracting and retaining high quality tenants.
5. Grown our Portfolio by 2.6 msf through strategic acquisitions and the continued build out of our office parks.
6. Achieved a Committed Occupancy of 95.0% as of March 31, 2018 and maintained Occupancy at greater than 93.4% at the end of the last three fiscal years.
7. Undertaken extensive renovation programs, including successful upgrades of 28 office lobbies and 7 food courts.

Embassy Office Parks REIT Issue Details

Below are the details of about upcoming Embassy Office Parks REIT Public Issue

• Embassy REIT Issue Opening Date: 18th March, 2019
• REIT Issue Closing date : 20th March, 2019
• Public Issue size : Around Rs 4,750 cr to Rs 5,000 cr
• Minimum order quantity : 800 shares
• Issue Price : Rs 299 to Rs 300 per unit/share.
• Listing at : BSE & NSE
• Credit Rating : AAA by ICRA. The outlook on the assigned rating is ‘Stable’.
• Issue Allocation Ratio : 75% to Institutional Investors and 25% to Non-Institutional Investors.

Tax Implications of REITs.

Tax implications of REITs are similar to that of stocks. 

1. The dividends distributed by REITs are tax free in the investors’ hands. REITs will pay the dividend distribution tax.
2. REITs will be listed on both BSE & NSE. The tax on Long Term Capital Gains (3 years holding period) is 10% if the LTCG are in excess of Rs 1 lakh.
3. The Short Term Capital Gains on the sale of units held for less than 3 year will be taxed at 15%.