Searching for yields in the real estate space
Bond yields have fallen sharply in recent years as the markets remain liquid as central banks print money. After a few years, Indian investors struggle with negative real interest rates (interest rates
As stock markets hit new highs, many investors looking to realign their portfolios are struggling to find appropriate options to increase the return on their debt portfolio without taking significant credit risk. In addition, some investors are looking for instruments other than corporate time deposits that can offer regular income. In this context, Real Estate Investment Trusts (Reits) offer long-term investors an attractive alternative to debt.
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Reits are good investment opportunities as they invest in class A commercial real estate and have a high-quality and diversified mix of tenants
Reits are investment vehicles that pool shareholders’ money to invest in real estate assets. Reit issues listed shares that can be bought and sold on the stock exchange. Sebi mandates that 80% of each Reit’s assets should be invested in operating and cash flow generating assets and 90% of those cash flows should be distributed to shareholders. Given these mandates, investors have insight into a regular stream of income.
There are currently three Reits listed: Embassy Office Parks Reit (sponsored by the Blackstone Group), Mindspace Business Parks Reit (sponsored by the K Raheja Group) and Brookfield India Reit (sponsored by the Brookfield Group).
All of these Reits are good investment opportunities as they invest in class A commercial real estate, have a high quality and diversified mix of tenants and are managed by experienced and well-known sponsors. While Embassy has a greater concentration of its portfolio in Bengaluru, Mindspace has most of its assets in Mumbai and Hyderabad, and Brookfield has a higher allocation to the Delhi NCR market.
After a weak quarter of the results from Embassy and Mindspace, we noticed some corrections in riding prices. While some decline in occupancy was expected, the final quarter saw higher than estimated exits from the portfolio. A major concern of investors is the rhetoric of working from home. While we believe that work from home will stay here, the need for office space is unlikely to be completely replaced. In the future, many companies will introduce a hybrid model that offers their employees flexibility. While this could affect demand for office space in the short term, as more people return to offices and companies start re-letting office space, the occupancy rate on this equestrian would increase.
Other factors that will drive demand in the coming quarters are the rise in cross-sectoral digitization and the fact that India is likely to remain a preferred global outsourcing destination. This is clearly evident in the leap in hiring at IT companies. India’s four largest IT giants – TCS, Infosys, Wipro, and HCL – hired 36,000 net employees in December 2020, up from 10,820 in the quarter ended December 2019. They reportedly plan to hire at least 91,000 additional employees in FY22 as well.
IT firms make up more than half of the tenant base in each of the Reits. There is a high likelihood that IT companies will rent additional space that the smaller tenants will vacate. In addition, these equestrians face very little exposure to some of the troubled sectors such as hospitality, airlines, travel, etc.
Prateek Pant is Head of Product & Solutions at Sanctum Wealth Management.
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