MINDSPACE REITs - should it occupy your Wallet Space ?

Namaste and Happy Morning, 

Last month the Gold Bonds would have gladdened the hearts of the female fraternity and now for the males, something which will gladden their hearts is coming. Yes, it’s the REAL ESTATE offering in the form of MINDSPACE BUSINESS PARKS REITs Issue.

The Confidence need to be appreciated! Mindspace Business Parks REIT is coming out with IPO in the midst of the Century's biggest crises, the Covid pandemic. The fact that it did not hold back the issue waiting for the pandemic to go away or reduce shows the supreme confidence it has in the success of the issue.

What gave them such supreme confidence?
Lets probe further. 

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 295 Lakhs 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 295 lakh sq feet, already 230 Lakh 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.
As of March 31, 2020, Mindspace REIT’s Portfolio is well diversified with 172 tenants and no single tenant contributed more than 7.7% of its Gross Contracted Rentals.

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 commerical 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.

WHATS GOOD ABOUT THE ISSUE 

1.
Owning a Real Estate is a challange 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 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.

7. 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.

8. The issue proceeds will be used to pay off Debts thus the yields could see an uptick.

WHAT’S NOT GOOD :
 
1. Typical Real Estate Industry Issues like a Bear Market could affect Capital gains

3. The Average Rental Yield is not very attractive in India at present (at about 5% to 8%).

4. Since REITS are listed in the stock markets, the demand/supply mechanism could affect the price of the listed entity and it could be quite volatile. They are not steady and flat. NO Sir!
And Short-term performance could be awful.
In fact, in the US, Dow Jones REIT Index fell 17% in 2007 and 39% next year!

WHAT EXPERTS SAY : 

Savilis India's Anurag finds REITs attractive who feels 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," said Nishant Agarwal, managing partner and head, family office, ASK Wealth Advisors.

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," said Samantak Das, chief economist and head of research, JLL India, a real estate consultancy firm.

Geojit's Vinod says that the Outlook for Commercial Properties do not look very positive going forward. And especially, for short-term, the risk is high.

And as Axis's Subramaian says, REITS is a 5-7 year story.

IIFL Securities has recommended the issue for investors seeking returns similar to the debt asset class. IIFL further says Collection of 98 percent of rent during the last three months with an additional 0.8 million square feet being leased ensures relative robustness of the model. It has a strong balance sheet to ensure inorganic growth opportunities.

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.

 Regards, 

Srikanth Matrubai, 

 

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.
Thus, The dividends received from REIT are tax-free. 




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 exemption will be given only for the companies which have not migrated to the new corporate tax regime.

The dividend portion of income from REIT being non-taxable, lends a significant advantage to a retail investor.

OFFER DETAILS

When Mindspace REIT will open?

The Mindspace REIT opens on Jul 27, 2020 and closes on Jul 29, 2020.

What is the lot size of Mindspace REIT?

Mindspace REIT lot size is 200 Shares and the minimum order quantity is 200 Shares.

How to apply for Mindspace REIT?

You can apply in Mindspace REIT online using ASBA as payment method. ASBA IPO application is available in the net banking of your bank account. Note that UPI is not an option in Mindspace REIT public issue. Read more detail about apply IPO online through ICICI Bank, HDFC Bank, SBI Bank, Kotak Bank and Axis Bank.

Opens on: Monday, July 27th 2020

Closes on: Wednesday, July 29th 2020

The issue has been underwritten by TOP insititutions like Morgan Stanley, Citigroup, CLSA, Kotak, UBS, Ambit, etc

Total Issue Size:

Rs.4500/- Crs. (Fresh issue. Rs.1,000/- crs & Offer for sale Rs.3,500/- crs)

Srikanth Matrubai Author of the Amazon Best Seller DON'T RETIRE RICH

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You are strongly encouraged to consult your financial planner before taking any decision regarding this investment.

The views expressed here is the authors personal views and should not be interpreted as a recommendation to invest/avoid.