Mindspace Business Parks REIT IPO opens; should you subscribe? Check REITs’ viability, other details

Real estate sector might be among the worst hit sectors amidst the pandemic with demand faltering, but analysts see long term benefits in REITs

Mindspace Business Parks Real Estate Investment Trust’s (REIT) initial public offering opens today, paving the way for the second REIT to be listed on the bourses in as many years. Mindspace Business Parks REIT is looking to raise Rs 4,500 crore from the issue, which will include a fresh issuance of Rs 1,000 crore and an offer for sale worth Rs 3,500 crore. Apart from this the real estate investment trust has successfully managed to raise 1,518 crore from 54 anchor investors. Real estate sector might be among the worst hit sectors amidst the pandemic with demand faltering, but analysts see long term benefits and the performance of the previous REIT listing augments their belief.

Previous REITs issue

Embassy Office Parks REIT, the first such issue to be listed on the bourses, entered the stock markets in April last year and gained 4.7% from the issue price of Rs 300 per share on the listing day. The stock price of Embassy Office Parks REIT surged 42.5% in the initial 11 months of listing. In comparison the BSE Realty Index slipped 4.4% between April 2019 and March 2020, while the Nifty Realty index was down 2.26% during the same time frame. Even after considering the fall in equity markets post March, Embassy Office Parks REIT has managed to give returns of 13.6% between April 2019 and April 2020. Meanwhile, some marquee listed names in the real estate space have managed to give far less or are trading with losses.

Mindspace financial profile

After more than a year of Embassy Office Parks REIT listing, Mindspace Business Parks REIT is now looking to explore the same avenue. Backed by Mumbai based real estate developer K Raheja Corp and private equity firm Blackstone, the Mindspace REIT IPO is being carried out with an aim to generate enough cash flows to sustain any disruptions. Apart from this partial or full repayment or pre-payment of certain debt facilities is another objective. As of March 2020, the total liabilities of Mindspace Business Parks REIT stood at Rs 11,222 crore, up from Rs 9,143 crore a year ago. Mindspace REIT generated a Rs 1,766 crore revenue from operations in financial year 2020, up from Rs 1,4316 crore in the previous year. With a price band of Rs 274-275 per share and a bid lot of 200 units, Mindspace REIT issue consists of 12.27 crore units. REITs have to pay out at least 90% of their net distributable cash flows to stockholders as dividend and that is an attractive investment proposal amid declining interest rate regime. According to the data provided by Mindspace this works out to the 7.5%-8% yield, said advisory firm Ashika Wealth Advisory. For investors with a long-term perspective, Ashika Wealth Advisors recommend subscribing to the issue. 

Diverse tenant list

The portfolio of Mindspace Business Parks REIT comprises five integrated business parks and five independent totaling to 29.5 msf of total leasable area. With a committed occupancy of 92%, Mindspace counts some marquee businesses as its tenant. “The Tenant base is well-diversified with no single tenant contributing more than 7.7% of its Gross Contracted Rentals, as of March 31, 2020,” noted HDFC Securities. Accenture, Qualcomm, JP Morgan, Amazon, UBS, Facebook, Barclays and Capgemini are some of the top tenants of Mindspace. “Mindspace REIT has been able to retain tenants across multiple sectors is attributable to its Portfolio’s superior infrastructure and regular tenant engagement. Out of 7.6 msf of area leased in the last three fiscal years, 58.8% was leased to existing tenants and 41.2% to new tenants,” HDFC Securities added.

During the pandemic, Mindspace Business Parks REIT was able to collect 99.4% of their Gross Contracted Rentals for the month of March 2020, although properties were not fully occupied by their tenants for the months of April and May 2020. Since the beginning of this fiscal year Mindspace REIT has managed to lease 0.7 msf of area of which majority was to new tenants. Some of the risks included with the REIT primarily related to the bleak outlook for the real estate sector. JM Financial Services in note said that Mindspace could also witness disruptions in under construction and future development areas. “Such delays could affect their estimated construction cost and timelines resulting in cost overruns, which in turn could adversely affect their reputation, business, results of operations and financial condition,” the note added.

Anchor investment

The 54 anchor investors that put in Rs 1,518 crore in Mindspace REIT at the upper price band of Rs 275 per equity share include the Government of Singapore, Cohen and Steers Global, HSBC, Fidelity, Nomura, Morgan Stanley, BNP Paribas, Fullerton among others. Domestic investors like SBI life Insurance, HDFC Life Insurance, Aditya Birla Sun Life Insurance, Max Life Insurance and Star Health and Allied Insurance also participated. Additionally, Mindspace Business Parks REIT has already received commitment worth Rs 1,125 crore from strategic investors which includes names like Singapore government’s sovereign wealth fund GIC, affiliates of Fidelity Group, Capital Group and Fullerton Group.