Mindspace REIT

Wait it out

REITs are a great way to get exposure to real estate. We do envision REITs as part of your portfolio in the long run, but just not yet.

Commercial real estate provides higher yields than renting residential property.

Embassy REIT, launched last year, returned 20% (in 15 months) along with 8% in dividends. They also reported negligible changes in rent collection in 1Q FY21.

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Mindspace has the same profile — quality clients and negligible changes in rent collection.

Returns

The expected yields are 3.5% in FY21 and 7.5% in FY22 as it cuts debt post-issuance — this compares to 6.79% for Embassy REIT currently.

A cut in interest rates can trigger capital gains

Transferability

Traded on the exchange with no lock-ins

Taxes

Dividends are not taxed — the REIT opted for a 35% corporate tax regime (and not a concessional 22%) which enables tax-free dividends for investors.

The REIT also receives interest income, which is taxed as per individual income tax slabs — interest comes from a 900-crore loan asset (provided to a SPV), but this contributes only ~9% of total distributions (91% are dividends) for the year

Risks

Mostly arising from the current subdued business environment

~25% of leases rollover in the next two years — it could increase vacancies

Rental agreements involved a standard 5% increase in rents every year — these could get renegotiated hampering growth across leased entities

Taxation could change, which will materially change yields

REITs are instruments somewhere between equity and fixed income. There is a diversified pool of clients like an ETF, with regular income like interest payments.

Lesser risk compared to a credit-risk fund comprising lessee firms. Unlike lending to SPVs and lower quality issuances in credit risk funds, you get quality firms but at a lower yield.

Secondly, bankruptcy risk is lower as well — in a credit risk fund, if a firm goes bankrupt, there is a significant write-off, but with a REIT, it is a matter of a few vacant months.

The issue is oversubscribed, but we feel the price is steep. Moreover, a small hiccup in the current environment can take yields below 7%. We are looking at REITs as part of your real-estate asset allocation, but we would prefer to wait than invest in Mindspace for now — we continue to prefer zero credit-risk with GILT and overnight funds.

If you are still considering this issue, it may make sense to pick it up in the secondary market as there are good chances for a better entry with the current uncertainty.

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