Should you subscribe to the Brookfield REIT IPO?

The IPO of Brookfield Real Estate Investment Trust (REIT) is open for subscription between February 3 and February 5 at the price band of ₹274-275. Backed by Canadian Asset Management Company, Brookfield, this REIT is the third to list in India and is expected to raise ₹3,800 crore as fresh issue. The amount is proposed to be utilised to bring down the REIT’s debt and improve the entity’s cash flow. As on September 2020, the total debt of Brookfield stands at ₹5,650 crore and post-issue it is expected to come down to ₹2,075 crore.

Currently, Brookfield REIT owns four large campus-format office parks across Mumbai, Gurugram, Noida and Kolkata. Its portfolio comprises of 14 million sq ft, which include 10.3 million sq ft of completed area, 0.1 million sq feet under-construction area and 3.7 million sq ft of future development projects. Three of the four office projects are located in Special Economic Zone (SEZ) and one is operating an IT Park (Noida). It has occupancy of 92 per cent as on September 2020, with multi-national companies including Amazon, Barclays, TCS, Cognizant and Pine Labs as clients. The REIT had been able to consistently maintain occupancy of over 90 per cent in the last four financial years.

The units of Brookfield REIT are being issued at a discount to the portfolio’s NAV (₹311), and the yield for investors is expected to be 7.2 per cent for FY22. Embassy REIT sports around 7-7.5 per cent yield. Quality of tenants, high occupancy and long-term lease contracts, of the REIT, offer income stability for investors.

Investors with a high risk appetite can consider investing in this issue. The minimum investment is 200 units.

Regulation mandates distribution of at least 90 per cent of the income generated by REITs to the unitholders. The REIT also earns income by way of capital appreciation at the time of sale of any of its underlying properties.

It's revenue for FY20 grew 8 per cent y-o-y to ₹956.7 crore. Though Brookfield showed profit of ₹15.1 crore in FY20, it clocked losses of ₹15.7 crore in FY19 due to increase in finance costs.

About the REIT

Brookfield REIT derives about 70 per cent of revenue from lease rentals and 30 per cent from maintenance and services. Brookfield REIT is predominantly present in key micro markets, unlike Embassy REIT’s properties that are mostly present in prime locations (mostly in urban regions). Thus, Brookfield’s office spaces are available at comparatively low rental cost, giving it an advantage to retain and attract new clients.

Brookfield was able to collect nearly 98 per cent of rentals from its client not only in September 2020 but also during between April and July of last year when lockdown measures were in place. This indicates the quality of client base of the REIT.

Also, the lease tenure is 3-15 years (average lease tenure of 7 years), with 12-15 per cent lease rental escalation every three years. Brookfield has about 5 per cent rental escalation every 12 months. Of the 0.9 million sq ft of lease expiring in 1HFY21, 0.5 million sq ft already been leased. With only 9 per cent of lease expiry in FY22 (about 0.38 million sq ft), the near to medium-term prospects is expected to be steady for Brookfield REIT.

A presence in SEZs works out in favour of Brookfield REIT as developers in these zones enjoy various incentives. For instance, developers of a SEZ can claim tax deduction of 100 per cent of the profits and gains derived from such business (subject to certain specified conditions) for a consecutive 10 years out of 15 years beginning from the year in which the SEZ is notified by the Centre. Similarly, companies operating out of SEZ too enjoys tax incentives.

Further, the demand for office space outpaces the supply, particularly in micro markets such as Noida and Gurugram. Factors such as better infrastructure facilities, low rentals and easy transport access from the REIT's property through urban mass transport systems can help attract and retain clients.

Risks

While Brookfield’s client base is diversified across sectors such as technology and financial services, its top three clients - Accenture (contributing 19 per cent to rental revenue), TCS (17 per cent), and Cognizant (10 per cent) – contribute a chunk to the revenues. Such concentration could impact the REIT’s revenue, if there is delay in lease renewal or change in client base. But presence in SEZs where acquisition and retention of clients may not be challenging is a mitigating factor.

Of the four office parks, Gurugram - Candor Techspace G2 is largest office space in terms of leasable area and in terms of rentals as well. So any adverse development in the micro market of Gurugram or delayed pick-up in the infrastructure development could affect the business.

Also, any changes in concessions (withdrawal of tax incentives or export subsidies) offered for SEZs could have an impact on in its operations.

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