Brookfield India Real Estate Trust IPO opens: Should you subscribe?

Initial public offering (IPO) by the global investment firm Brookfield India Real Estate Trust (REITs) hit the capital market on Wednesday to raise up to Rs 3,800 crore. This is the third real estate investment trust to launch the public offer after the successful listing of Mindspace Business Parks REIT in 2020 and Embassy Office Parks REIT in 2019.

Brookfield REIT, the country’s only 100% institutionally managed public commercial real estate vehicle, is issuing units aggregating up to Rs 3,800 crore. It is offering 14 million square feet of its commercial portfolio in the REIT.

REIT has introduced in India a few years ago, aimed at attracting investment in the real estate sector by monetising rent-yielding assets. It helps unlock the massive value of real estate assets and enable retail participation.

Here are the key things one should know about the issue:

About the company: The Brookfield REIT is India’s only institutionally managed public commercial real estate vehicle. Sponsored by an affiliate of Brookfield Asset Management, one of the world’s largest alternative asset managers with approximately $575 billion in assets under management, as of September 30, 2020, their goal is to be the leading owner of high-quality income-producing commercial real estate assets in key gateway Indian markets, which have significant barriers to entry.

Price band and dates: The company has fixed a price band of Rs 274 to Rs 275 for the public offer and the public offer will close on February 5.

Objective of the offer: The net proceeds from the public issue will be utilised for partial or full pre-payment or scheduled repayment of the existing debt of Asset SPVs (special purpose vehicles). This means an investor need minimum Rs 55,000 crore

Minimum lot size: As a retail investor you can bid for a minimum of 200 units and in multiples of 200 units thereafter. Hence, the minimum application size by investors would be Rs 55,000 at higher price band. The units are proposed to be listed on BSE and NSE.

Financials: Despite a strong operating margin, Brookfield India Real Estate Trust’s financials have not been encouraging. Its net profit stood merely at Rs 15 crore in FY20, while the company incurred Rs 74 crore net loss in H1FY21. While its revenue clocked 8% CAGR over FY18-20, net profit witnessed negative CAGR during the period primarily owing to 48% CAGR in finance cost during the period, as its debt positioning increased significantly due to investment in properties. According to Reliance Securities, the company’s net worth was negative (-Rs 2,480) as on H1FY21.

Strengths:
1) 75% of gross contracted rentals contracted with multi-national corporations such as Accenture, Barclays, RBS, TCS and Cognizant.
2) REIT has mark-to-market headroom of 36% to achieve further organic growth through contractual lease escalations.
3) Exposure only to commercial office space which is the least impacted segment in real estate due to Covid-19 outbreak.

Investment concerns
1) Increase in Work from home (WFH) can lead to a higher vacancy in key market geographies and can create a slowdown in demand for commercial space in the near term.
2) Highly concentrated on Gurugram market, 42% of overall rent comes from Candor Techspace G2, Gurugram.
3) REIT will take a long time to increase its revenue as REIT has under development property of 0.1 msf only along with this 92% of the committed property has already been leased out.

Should you subscribe: Reliance Securities gave ‘Subscribe’ rating to the issue with long-term
perspective. “Given substantial reduction in debt level after fundraising, we expect saving on finance cost should aid the company to generate positive net distributable cash flows (NDCF) from FY22E onwards. However, the NAV per unit as on H1FY21 is estimated at Rs 311 (13% premium from issue price). Further, the company expects NDCF to the tune of Rs 660 crore and Rs 700 crore in FY22E and FY23E, respectively which offer a yield of around 8%,” the brokerage said.

On the other hand, Angel Broking gave ‘Neutral’ rating to the issue due to uncertainties around Covid-19, weak financials and high debt on the book.
“Due to the current uncertainties around Covid-19 and proliferation of work from home, we expect that demand for commercial real estate to be muted,” Angel Broking said.