Why Is Brookfield’s REIT Trading At A Discount To Other REITs On The Market?

Real Estate Investment Trusts (REITs) are a recent addition to the Indian investment landscape. REITs invest the funds raised through debt and equity into income-generating real estate.

The income is then paid out to shareholders of the REIT, as is mandated by the regulatory agencies. Apart from generating regular income, REITs offer high liquidity to investors, which is almost impossible in direct real estate investing.

While REITs have emerged as popular investments in developed markets, India is still in the nascent stage in the REIT market. The Securities Exchange Board of India (SEBI) has done away with large lot sizes, and minimum investment requirements, making the space easy-to-access for retail investors.

The first Indian REIT was the Embassy Office Parks REIT (EOP) that was listed in 2019. Soon, Mindspace Business Parks REIT (MBP) listed in 2020, followed by Brookfield India’s REIT (BIRET) in 2021.

However, a back-of-the-envelope calculation indicates that Brookfield’s REIT is trading at a discount to the other REITs. BIRET has a yield of 8.75 per cent, whereas EOP trades at a yield of 6.06 per cent and MBP’s REIT trades at around 3.5 per cent.

While yield does not give us a comprehensive idea of valuation, it does work as a rough indicator of investor interest.

Here’s why BIRET might be trading at a discount to other real estate investment trusts:

Tenant Concentration

One of the possible reasons for BIRET’s higher yield could be its exposure to tenant concentration risk. It derives 75 per cent of its gross contracted rentals from its top 10 clients. In comparison, both MBP and EOP generate around 38 to 40 per cent of their rentals from the top 10 clients.

Further, BIRET’s top three clients contribute to 46 per cent of gross contracted rentals. Dependence on a few tenants from the same industry could potentially affect BIRET adversely. One of its largest tenants, Tata Consultancy Services, has declared its “25 By 25” plan, where only 25 per cent employees would work in office in 2025.

Asset Base Size

BIRET owns four projects across National Capital Region, Mumbai, and Kolkata with a total area of 14 million square feet. In contrast, Mindspace owns five integrated business parks and five independent projects across Mumbai, Hyderabad, Pune and Chennai with a total area of 31.2 million square feet.

Similarly, Embassy has built eight office parks and four city-centre offices with a total area of 42.4 million square feet. Some of these projects would also include hotels built by Embassy in partnership with international hotels chains like Hilton.

Hence, in comparison to Mindspace and Embassy, BIRET currently has a relatively small and less diversified asset base.

Rentals

BIRET’s largest leaseable area is in Kolkata, which has a low rent of Rs 41 per square foot, resulting in an average rent per square foot of around Rs 65.

In contrast, Embassy’s average rent per square foot stands at Rs 71, while market rents stand at around Rs 91, giving it leeway for escalations.

Embassy is based out of Bangalore, which is one of the best performing markets for offices.

Lease Expiry

Between financial year 2022 and 2025, as much as 40 per cent of the leases are expected to expire for BIRET. Embassy expects only 23 per cent of its leases to expire over the same period.

According to data provided by Mindspace to investors, it expects only 5.8, 7.3 and 5.4 per cent of its rental contracts to expire over the next three years.

BIRET’s relatively high proportion of lease expiries could be a reason behind its relatively high higher yield.

Nevertheless, Brookfield has been exploring both organic and inorganic opportunities to grow its asset base. In addition, all three companies have managed to maintain high occupancy, and rental collections have remained at 99 per cent as well.

The low debt levels and loan-to-value (LTV) ratio would allow them to raise debt easily. Low LTV ratios are crucial as they prevent a decline in property value from adversely affecting the finances of the trust.

The Brookfield Group has decades of experience in the asset management business.

REITs can be explored by investors who are bullish about India’s property market. Unlike fractional investment funds that run in the markets, REITs require no minimum investments and allow retail investors to buy into blue-chip real estate easily.

Infrastructure investment funds and REITs allow investors to directly receive cash flows from the assets, rather than through listed companies that are often manipulated by promoters.

In addition, spinning off cash-generating assets allows companies to monetise their assets with immediate payments, rather than through uncertain annuities over the years.

Several companies like Power Grid, Sterlite Power, IRB Infrastructure, and Reliance Jio have used the infrastructure investment trust route to monetise their assets.