REITs: Flavour of the Month?

Did you know that Charlie Munger earned his first million by investing in real estate?

Here's the story I came across in a book I was reading a while ago...

Otis Booth, an American billionaire newspaper executive and investor, came to Charlie Munger when he was studying law, asking Charlie to handle the sale of some real estate assets.

Considering the location that Booth was looking to part with, Munger immediately advised him to keep the property and develop it by building his own apartments.

To this, Mr. Booth reverted...

• Charlie, if this is such a good idea, and you're so sure it will work, why don't you put up some of the money and join me. I won't do it without you.

What followed was Munger and Booth joining forces and investing around US$100,000 to build that property.

From parting with a huge investment to buy that property, holding it through recessions, to selling it at an incredible 400% profit, this is one of Munger's greatest success stories in real estate investing.

While we can go on and on about the perks and benefits of investing in real estate, there are some challenges like high investment.

There's also the constraint about diversification... most people find it tough to even buy a single property. Now imagine the capital required to diversify your real estate investments through a variety of real estate holdings like office spaces, retail shops, and industrial buildings.

This is where REITs come in!

In simple words, a real estate investment trust (REIT) is a company, that raises funds from investors and invests the funds in a portfolio of real estate assets. It also controls and manages the real estate portfolio.

The real estate assets generates rental income which is distributed to the shareholders of the REIT.

Thus, investors in a REIT earn steady income in the form of dividends from the real estate assets in the REIT without having to directly invest in these assets themselves.

As things stand now, the sentiment around REITs has suddenly turned bullish.

In a first, fund managers have started investing in REITs and infrastructure investment trusts, hoping to earn a regular income, enjoy long-term cash flow visibility and for having better risk-adjusted returns.

Investments Grow Over 3-Fold

According to an ET report, mutual funds have steadily invested in REITs over the last couple of years, largely through their hybrid schemes.

As of February 2024, they own assets worth Rs 114.5 billion (bn), up from Rs 41.9 bn in February 2023.

The biggest Indian fund houses have been adding these products to their hybrid schemes, where many investors expect stable income with low volatility.

Performance of Listed REITs in India

Post pandemic, REITs came more into focus and they've currently showing strong visibility of cash flows in coming quarters.

On account of the economy bouncing back from Covid, and employees coming back to offices, major listed REITs in India have seen their share price go up in the year gone by.

Performance of REITs in FY24

Company	Current Price (Rs)	% Change (1 year)
Brookfield India Real Estate Trust REIT	254.57	-8.90%
Embassy Office Parks REIT	369.16	18.20%
Mindspace Business Parks REIT	343.6	7.30%
Nexus Select Trust	128.80	23.70%

Source: Equitymaster

Let's look at individual stock performance and what lies ahead for these REITS.

#1 Brookfield India REIT

The soler underperformer from the pack of listed REITs, Brookfield India REIT is expected to bounce back strong in the coming quarters.

For the first nine months of FY24, its income from operating lease rentals grew by 43% YoY to Rs 8.8 bn and adjusted net operating income grew by 46% YoY to Rs 10.5 bn.

In the same period, the company raised Rs 27 bn in capital with strong participation from the sponsor group, existing unitholders, and new investors.

The company also completed the acquisitions of Downtown Powai and Candor TechSpace in an equal partnership with GIC in August 2023.

With a favourable leasing outlook, the management is confident of substantial occupancy improvement.

#2 Embassy Office Parks

In the year gone by, Embassy Office Parks share price rallied 18%.

The company owns and manages a portfolio spanning 45 million square feet, consisting of nine office parks with infrastructure-like features and four office buildings situated in the city centres of Bengaluru, Mumbai, Pune, and the National Capital Region (NCR).

In December 2023, private equity firm Blackstone Group exited Embassy Office Parks REIT in the second-biggest block deal trade of FY24.

Following its Q2 earnings announcement, the company increased its leasing guidance for FY24 from 6msf to 6.5msf.

The management has guided for the overall portfolio occupancy and same-store occupancy to be at 85% and 87% by FY24.

Going forward, the management has guided for even better quarters due to strong growth prospects, improvement in leasing trends, and better occupancy.

#3 Mindspace Business Parks REIT

Mindspace Business Parks REIT share price went up by 7.3% in the year gone by.

During its analyst call held in January 2024, the company's CEO highlighted positive outlook for its India office market.

In the recent quarters, the slowdown in churn from IT companies and increased physical attendance has driven its growth.

The company's board recently approved acquiring new spaces and initiating divestment process for underperforming assets.

#4 Nexus Select Trust

Finally, we have Nexus Select Trust, which has raised some eyebrows after posting an impressive performance since listing.

Shares of Nexus Select Trust REIT listed at 3% premium over issue price at Rs 103 per share in May 2023.

Since then, the stock has surged to touch a 52-week high of Rs 139 per share. It currently trades at Rs 129 per share.

In January 2024, the Blackstone backed company signed a preliminary agreement to acquire three malls from Larsen & Toubro (L&T) in Hyderabad for around $300-350 million.

The malls under the brand name 'Hyderabad Next Galleria Malls' are located at strategic metro stations and have been developed by Larsen & Toubro as part of the ecosystem to transform the shopping and entertainment experience in the city.

The acquisition of these malls has taken Nexus Select Trust's portfolio to around 11 msf of retail portfolio.

For the first half of FY24, Nexus Select Trust reported a net operating income of around Rs 6 bn on revenue of Rs 8.2 bn. Majority of contribution came from the retail portfolio, at around Rs 7.3 bn.

In the third quarter, Nexus Select Trust reported the highest ever quarterly tenant sales and occupancy.

What Next?

In recent months, the real estate sector has gained a lot of traction because of uncertainties prevailing in other investment arenas, and increased consumption spending by investors.

Rent prices have started to skyrocket in several big Indian cities.

India's strong growth potential could lead to high demand in offices and commercial space in Tier 1 and Tier 2 cities.

So for now, REIT stocks enjoys sectoral tailwinds.

REITs also enjoy several more benefits, which we discussed in the below video:

In conclusion, we believe REITs can prove to be the proxy plays to cash in on India's capex boom.

In 2024, the capex plays will come into focus as this election year could be a turning point for companies that have incurred massive capex spends to expand capacities.

India's capex cycle also has the support of the right government policies (PLI) now.

Apart from this, the demand for real estate is also picking up. Structural growth in affordable housing over the next few quarters is likely to cement this position even further.

In such an environment, investing in Infrastructure Investment Trust (InvITs) and Real Estate Investment Trusts (REITs) seems like a good bet.

REITs and InvITs are innovative vehicles that allow developers to monetise revenue-generating assets while enabling investors or unitholders to invest in these assets without actually owning them.

They are modelled after mutual funds and are traded over the stock exchanges.

InvITs are expected to gather steam in 2024 as PSUs and other entities look to monetize their assets to the capex cycle.

Right now, there are very few options. But over time, as more REITs list, there will be more options available to investors.

Either way, this is one space that needs to be tracked and followed.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...