A short note on REIT investing options

A Real estate investment Trust ( REIT) is essentially a vehicle that consists of a portfolio of Real estate assets. Think of it as a mutual fund for acquiring Real estate assets. Current SEBI regulations require all listed REITs to payout 90% of all distributable cash to unitholders.

The investment rationale in REITs is twofold;

• A healthy dividend yield ( > FD)
• Capital Appreciation.

Dividend received in a REIT is a mix of Interest, Capital gains, Rental income. The taxation rates for all three are different so we have included a blended rate for the same.

Currently, there are 3 Listed REITs in India

1 Mind Space
2 Embassy
3 Brookfield

Fourfold Investment rationale for selecting REITs ;

• Distribution yield = Dividends distributed by the REIT. The Higher the better.
• Average Lease Expiry (ALE) – Gives us a view on when the underlying office space will go vacant. The farther away from the date, the better.
• NAV ( Net Asset Value) – Similarly to the NAV of a mutual fund – the NAV of a REIT is essentially the market value of the properties fewer liabilities. If the REIT is trading significantly below the NAV, it is a good opportunity to enter.
• Sponsor – The owner and Trustee of the REIT. The better the brand name, the more credibility it attracts.

MINDSPACE REIT
Sponsored by K Raheja Group – It ticks all boxes. Revenues growing by ~ 10% in the last 4 years. With 85% occupancy and ALE at 6 years – Mindspace offers the second-highest dividend yield. Average dividend yield – 7%

Taxation – 90% of the dividend is tax-free in the hands of investors

Post Tax yield – 6.45%
Current NAV – 350
Market Price – 286

Embassy REIT First listed REIT and largest in Asia.

Focused mostly in Bangalore ( 75%). Ticks all boxes with Average lease expiry of 7 years. The only downside is it holds hotels in its portfolio of properties (5%) and if travel continues to be restricted in near future – that portion might take a hit.

• Dividend yield – 6.10%
• Taxation – ~ 80% of the dividend is tax-free
• NAV – 380
• Current Market price – 350
• Post Tax yield – 5.76%

Brookfield REIT: India’s only institutionally managed real estate. Properties mainly focused on Mumbai, Delhi, Gurgoan, and Kolkata.

Ticks all boxes

Brookfield offers the highest dividend yield among the three. Brookfield also has much better expansion plans to double the leasable area in the next 3 to 5 years.

Dividend yield – 8.5%
Taxation – Only 30% of the dividend is tax-free in hands of the investor.

• NAV – 345
• CMP – 267
• Post Tax yield – 6.57%

In our opinion – The Brookfield REIT offers both a decent dividend and has the best prospects of capital appreciation. To maintain diversity, we would recommend a buy of both the Brookfield REIT and Mindspace REIT.