What Are REITs? What Should You Know About Brookfield REIT’s IPO?

Investment in real estate has been the call to legacy for generations of Indians. The idea that you should deploy your savings in a “real” appreciating asset (not always, but let’s see where this is going first!), in exchange for assured long term returns high enough to secure your retirement, is as old as the very retiree telling you that.

However, real estate investments also bring to mind a sense of impending dread, thanks to lack of transparency, formalisation, and general dodginess — so often representative of this market.

Dealing in large cash transactions, talking with overtly salesy brokers, and taking operational risk of developing and managing a property is not for everyone’s stomach.

Well, the rise of REITs may change that.

What?!

REITs or Real Estate Investment Trusts are a relatively new asset class in India, offering retail investors the chance to buy stakes in real estate projects, almost akin to holding a stock.

Not only have the REITs gained significant traction over the last two years among both issuers and investors, they have been innovated and evolved into more promising vehicles of investments by launching them into an increasing number of public offers. The Brookfield India Real Estate Trust (Brookfield REIT) whose IPO would be open for subscription on February 3rd 2021, is a case-in-point.

What Are REITs?

These are special purpose investment vehicles (similar to InvITs) which are created with the main purpose of channeling funds that can be invested into the operational functioning or ownership of real estate. A REIT offers investors the opportunity to hold shares in the trust, which in turn funds the building of infrastructure needed by real estate ventures.

The profits generated from these ventures provide the return on investments pumped back into the trust.

Essentially, they are structured like mutual funds. They were first introduced by SEBI in 2007 but only became ready for incorporation after their revised regulations were approved in 2014.

There are two types of REITs: equity and mortgage based. Equity REITs are more common and they deal with income-producing real estate. The returns on these are fetched from the rental incomes obtained from properties and holdings held by the trust. Mortgage REITs, on the other hand, extend loans to real estate operators who in turn deal with income-producing real estate. Their returns are fetched through the interest payments on the mortgage.

Bottom line is, REITs enable investment in real estate without requiring the investors to bother with the operational aspects (building, management, sale, maintenance, renovation etc.) of the holdings. Like any other security, they can be enlisted on the stock exchange and publicly traded in. They provide relatively liquid means to hold stakes in the real estate while also offering regular outlets of income, portfolio diversification and long term capital appreciation.

FYI: The Government of India has ensured the removal of Dividend Distribution Tax associated with REIT funds, thus making them more lucrative.

REITs in India

The first REIT IPO in India was launched by a Bangalore-based developer called Embassy Office Parks in 2019. It was backed by the global PE giant Blackstone and raised its stipulated target of ₹4,750cr ($650.4m).

Although REITs had secured substantial support from the Indian investors, it was qualified as a “big-ticket investment” due to the set limit of ₹2L ($2,740) minimum. Shortly after Embassy’s IPO, SEBI managed to remove this hurdle by amending the threshold investment limit to ₹50,000 ($685).

Brookfield REIT IPO

Brookfield is the third REIT IPO in India after Embassy Office and Mindspace Business Parks (2020). It is also India’s only institutionally managed public commercial real estate vehicle. Backed by the Canadian AMC Brookfield Asset Management, it aims to raise ₹3,800cr ($520.3m) via this IPO.

Pursuant to regulations, the following features will form the key criteria for its launch:

• At least 80% of the value of its assets will be invested into income-generating properties.
• A maximum of 20% may be invested in enterprises (equity, debt, under-construction properties not generating rent etc.) which derive at least three-fourths of their operating income from real estate activity.
• At least 51% of Brookfield REIT’s consolidated revenue must arise from rental, leasing, letting or associated incomes from its real estate assets.
• The price band will remain in the vicinity of ₹274-₹275 ($3.7).
• The bucket size of allotment is divided among institutional and other investors in the ratio of 3:1.

In terms of financials at least 90% of the Net Distributable Cash Flows from Brookfield REIT’s proceeds are mandated to be declared and paid to the investors on a quarterly basis, within 15 days after the date of such declaration. Net Asset Values (NAVs) must also be updated on a biennial basis.

Brookfield manages c. $578bn in assets globally and owns and operates about 22 million square feet of office properties in India. The proceeds from the IPO have been stated by the company to be used for partial or full repayment of its existing debt obligations.

Growing Number of REIT IPOs in India

After the pandemic, the real estate sector in India is faced with increasing cash starvation and lack of stimulus. IPOs of this nature offer highly beneficial avenues for fundraising and promise a way out of the times of slump.

Post the first two IPOs, the share of REITs in the overall real estate market of India rose to 29%. The market is projected to grow to $22–40bn over the next few years.

REITs have also traditionally outperformed their sectoral index (S&P BSE Realty Index). With their offer of stable cash flows and consistent returns they emerge as promising investment alternatives.

However, it is important to take into accounts the quality of their underlying asset portfolios and sources of cash flow. For a new and upcoming investor, it is important to look into the leverage situations, credentials and experiences of the fund managers and risk management policies of the issuer, before considering an investment into REITs.

(Originally published February 1st 2021 in transfin.in)