Portfolio

Embassy Office Parks REIT IPO: Check in

Bavadharini KS BL Research Bureau | Updated on March 20, 2019 Published on March 19, 2019

Currently, Embassy Office has 33 million square feet of office space in its portfolio

After a long wait, the first Real Estate Investment Trust (REIT) in India is finally being rolled out. Investors now have the option of investing in rent-yielding property for a relatively smaller sum. REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties.

The Embassy Office Parks REIT (EOP REIT) is open for subscription between March 18 and March 20 and the price band is ₹299-300. The minimum subscription is 800 units (about ₹2.49 lakh) and investors can subscribe in multiples of 400 units thereafter. The issue is expected to raise ₹4,750 crore. This would help the REIT bring down its debt level and improve cash flow by acquiring other rent-yielding commercial property.

Currently, the REIT owns seven office parks and four office buildings in prime locations (Bengaluru, Mumbai, Pune and Noida) and has occupancy of over 93 per cent and client retention rate of 81 per cent in the last three years. Its portfolio has about 33 million sq ft of office space with 160 marque clients such as IBM, Google and Microsoft.

The yield for investors from Embassy Office Parks REITs is expected to be around 8 per cent a year over the next three years. Ownership of properties in upscale localities ensures occupancy and gives good visibility for future revenue. Besides, the units are being issued at a discount to the portfolio’s NAV. But investment in real estate is exposed to the risk of volatility in property prices and rental income. Therefore, only those investors with higher risk appetite can consider investing in this issue.

In the hands of the unit-holders, the dividend paid by REITs is tax-free while the interest or rental income received is subject to tax at the applicable slab rate. That is, the interest income is taxable under the head income from other sources and rental income is taxed under income from house property. Note that, tax deducted at source (TDS) on both the interest and rental income is applicable at the rate of 10 per cent.

About the issue

The Embassy Office Parks REIT will be listed on both the BSE and the NSE, providing an exit option in the secondary market.

About 90 per cent of Embassy Office properties already generate income. Nearly 81 per cent of the revenue comes from multinational corporates. Quality of tenants, high occupancy and long-term lease contracts offer income stability and minimal chances of default.

Also, average lease tenure is five to nine years or more. It has three to five years initial commitment period and contractual escalations of 15 per cent every three years. Given the lack of availability of quality office space, especially in cities such as Bengaluru, the concentration of Embassy’s offices (nearly 61 per cent) in Bengaluru would help attract and retain clients.

The REIT has about 2.5 million sq ft under construction properties and 5.4 million sq ft of proposed development area.

An advantage of investing in REITs is that regulation mandates distribution of at least 90 per cent of the income generated by REITs to the unit-holders. Embassy REITs aims to pass on the income in the form of dividend and interest every quarter to its investors. REIT also earns income by way of capital appreciation at the time of sale of any of its underlying properties.

In addition to the rental income, Embassy Office Parks also generates income from its amenities such as hotels, car parking, and food and facility maintenance.

Downside

Investors also need to take note of the risks associated with the EOP REIT. One, nearly 49 per cent of gross rentals come from clients in the technology sector and top 10 companies account for 42 per cent of gross rentals. So, if there is a downturn in the technology sector or if companies pull out of the contract, the revenue of the REIT would take a hit.

Second, Embassy Manyata in Bengaluru accounts for 49 per cent of the Embassy Office revenue and is one of the largest office parks. Any slowdown in Bengaluru market or political or economic issues in Karnataka would affect revenue. With REIT being a new investment avenue, the rules are still evolving and future changes in rules could be adverse for investors.

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