GUIDE AJ INKYA A JAGTAPA.R . CHAVAN

TRINITY ACADEMY OF ENGINEERING,PUNE

Paper code- 89ST02PANeed of REIT And its prospective Implication in India

Content Introduction REIT’s IN India Methodology Illustrative case study of phoenix malls Conclusion References

INTRODUCTION A Real Estate Investment

Trust or REIT is a company that owns and operates income-producing real estate

REITs are also known as Real Estate Stocks

Some REITs not only finance real estate but also, operates

REITs provide an alternative way of holding Real Estate properties without physically possessing them.

COMMERCIAL REAL ESTATE• The commercial real estate market comprises of office, retail and industrial

segments . It is primary dependent on growth in services ( IT/ ITeS and BFSI ) and industrial ( logistics , warehouse and manufacturing sectors of the economy .

• Commercial and retail sectors are fragmented and have fewer national players.

• The commercial sector had a demand of 38.2 million sq.ft in 2011.• The retail industry has a demand of around 15million sq.ft in major cities to boost the demand.• Unlike residential properties, commercial office and retail spaces need big-ticket investments due to the size of the units.

Types of commercial real estate

CHARACTERISTICS OF REITs

REITs are closed-ended or open-ended companies or trusts that hold, manage, lease, develop and/or maintain real estate for investment purposes.

REITs receive special tax consideration and are characterized by low transaction costs.

REITs can only be used to invest in completed properties and not under-construction projects.

The income source for REITS mainly comprises regular lease rentals and asset sale proceeds.

REITs has a time horizon of five to seven years

REITs are mandatorily required to distribute 90% of their net income to investors every year.

EVOLUTION OF REITs

Source: Analysis of REIT regulations By, KPMG, NAREDCO, Knight Frank, March 2015

TYPES OF REITs

Equity REITs: (96.1%) – Invest & own properties. Revenues are generated from their properties rents

Mortgage REITs: (1.6%) – Deal in investment & ownership of property mortgages. They loan REITs money for mortgages to owners of real estate, or invest in existing mortgages of mortgage backed securities. Revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: (2.3%) – Combine the investment strategies of Equity REITs & Mortgage REITs by investing in both properties and mortgages.

SECTORS WISE DISTRIBUTION OF REITs

Mortgage 7%Hybrid 1%Speciality 7%Health Care 13%Self storage 8%Lodging/Resorts 4%Diversified 7%Manufactured Homes 1%Apartments 13%Free standing retail 2%Regional malls 8%Shopping centers 11%Mixed 3%Office buildings 11%Industial facilities 4%

REITs in Asian countries

REIT was introduced in the early 2000s in Asia and has now grown into a

market net worth of US$140 billion.

The most developed markets in terms of market capitalization are Japan,

Singapore and Hong Kong

REITs are also listed on the stock exchanges of South Korea, Malaysia,

Thailand and Taiwan

Singapore REITs

REITs were introduced in Singapore in the early 2000s and the first REIT listed on

Singapore stock exchange was in 2002.There are currently 34 REITs listed on SXE

out of which 5 are giving positive.

Japan REITs

Japan was the first market in Asia to introduce REITs. Japan was the first market in

Asia to introduce REITs.

South Korea

REITs were introduced in July 2001 and first REIT was established in January

2002.There are currently 4 listed REITs on KRX.

REITs in India

The Real Estate Investment Trust (REIT) is an investment instrument that

will allow investments in rent-yielding completed real estate properties

who has the potential to transform the Indian real estate sector

A REIT has two unique features. The primary function is to manage

income-producing properties and to distribute most of the profits as

dividends

REITs and its positive effects have made it a very popular instrument

worldwide for both investors and for the industry as well. It is considered

beneficial for its transparency, liquidity and smooth operations

Advantages of REITs to stakeholders

(Source referred: “Are we ready for REITs?” Report by KPMG, September, 2014)

UNDERSTANDING THE FINANCIAL STRUCTURE OF POTENTIAL REITFollowing things shall be must for any company:-

i. VALUATION –Real estate at fair market value price, assessed by International Valuation

Standards

ii. TIMING – Portfolio valued by external valuer at least once a year and noting its reporting

date.

iii. REPORTING- Full-fledged portfolio value should be reported and all situations like

assumptions etc. also reported

iv. DISCLOSURE- Real Estate companies should disclose the valuation method applied, and

specify quantitative elements and assumptions applied in valuing the investment property.

v. BALANCE SHEET- Valuation of assets for the entire Portfolio, everything mentioned directly,

transparently.

vi. Presentation of ACCOUNTS- Profit & Loss Accounts , Balance Sheet , Cash Flow statements

etc. – which would help one to understand how the company is , and help in decision

making.

Observations and analysis

The performance and operation of REITs were studied in Asian countries of

Singapore, South Korea and Japan. Along with these countries REITs were also

studied in the Indian context.

Literature Review

A detailed literature analysis was done to review the REITs and their performance

in existing countries. Various research papers and reports on REITs were also

studied.

METHODOLOGY

REITs in the Indian context

REITs were also assessed in the Indian context. SEBI issued regulations for REITs in

India. These regulations were studied to create the REIT model along with the

entire framework of REITs

Illustrative case analysis

An analysis of investments is performed through a case study and carries it into

REIT framework

REIT: ILLUSTRATIVE CASE STUDY OF PHOENIX MALLSPHOENIX MILLS LTD –

Phoenix group is one of the pioneers of the Real Estate industry in Retail sector, through

there malls. This group is present in retail units, entertainment complexes. Commercial

real estate, hotels, residential complexes. This group has presence in 8 major cities –

Mumbai, Bangalore, Pune, Chennai, Raipur, Agra, and Indore.

For our study, we have assumed that Phoenix forms an SPV for REIT and includes

1) Phoenix Market City- Bangalore

2) Phoenix Market City-Pune

3) Phoenix Market City – Mumbai

4) Phoenix Market city – Chennai

(Source: - Phoenix Mills Investors Guide)

STRUCTURE OF PHOENIX MILLS LTD

                 

Mall OpeningTotal Land

Total built up

Gross Leasable

area units

avg unit size

(sqft)

Current occupancy

rate

Average daily

footfalls

Mumbai Nov-1121

acres 20,30,0001,150,000

244 3194 84% 65,789

Pune 201118

acres 20,10,0008,00,000

298 2667 83% 13,518Bangalor

e Nov-1116

acres 10,40,0007,00,000

256 2545 87% 65,789

Chennai Nov-1117

acres 20,80,0009,80,000

236 2432 80% 67,782

PHOENIX MALLS

Financials in Rs.Mn.Equity Debt

Total project

costPhoenix market city

Bangalore 1,950 3,567 6,111Phoenix market city

Mumbai 3,091 6,006 11,150Phoenix market city

Pune 1,568 4,334 8,053Phoenix Market city

Chennai 1,498 3,455 6,650total 8,107 17,362 31,964

Source: Phoenix investor guide

Financials of Phoenix malls

Data Sources and Assumptions

REIT –Amount Rs1750 crores (4 Phoenix Malls together)

Ticket size to be around Rs 2 Lakh

We have not assumed any limitation on number of subscribers.

Not all debt of the Phoenix Mills is converted for REITs; only Debt of the 4 Malls is

taken into considerations.

All data, is data from Phoenix Mills Ltd annual reports and further from Institutional

Research by HDFC Securities.

ASSUMPTIONS

We have made estimates for 2016 and 2017, by assuming the occupancy rate to be the

same, have increased the rental rate for each mall by 7%, and have assumed the income

from other sources than rental (all recoveries, parking, etc.) as 40% of rental income,

which is less than the actual.

Taking a single tax, as dividend distribution tax and no other tax into consideration.

The entire money they will get through the REITs trust and all the rental yield shall be

distributed to all the investors of REITs. We shall assume the ticket size is of Rs.2 Lakh each

as we cannot determine how many tickets will be sold, nor can we assume number of

people buying the shares in REITs

Steps

1. Using various reports check there estimated balance sheet, estimated rental income etc.

2. Use this data for reference only.

3. Find out what is the current rental income achieved by all the malls, and divide by their leasable area. By this we can determine the rental value per sq ft.

4. Then we found out other incomes with a particular mall, like income from Parking, advertisements, events etc.

5. For all that, we found out Return on Investment for the Phoenix Mills.

6. Now, assuming the REITs is started in 2016. We first calculate the Rental yield per sq ft by assuming an increment in the rental yield of 7 % ( keeping it conservative )

6. Through this rental yield and estimated other recoveries and income (used

from their financial reports, HDFC bank Ltd) , we calculated the Income for

the REITs .

7. Then we calculated the expenses for the REITs – Malls. This we did by first

finding the previous year’s expenditures, and incremented it.

EXPENSES    OPERATING, MAINTENANCE & SECURITY 5%UTILITY EXPENSES & OTHER   3%  Total 8%DEPRECIATION   6%INTREST   0TAX   33%

OTHER EXPENSES CONSIDERED

Interpreting the balance sheet of Phoenix Mills Ltd.

( in crores )         2013 2014 2015share capital 29 29 29Reserves 1739.7 1694.8 1973.4Total Shareholders fund 1768.7 1723.8 2002.4long term Debt 2138 3363.2 3313.2Short Term Debt 57.6 42.9 42.9Total Debt 2195.6 3406.1 3356.1Total sources of Funds (      incl other sources ) 4341.8 5764.1 6131.6       Total current Liabilities 621.2 908.7 972.6Net current Assets 835.8 1006.5 1307.4       

Source: Consolidated balance sheet of Phoenix mall

             2013 2014 2015

  Net sales 469.91448.

51882.

5  Expenses 214.4 757.8 812.3

  EBIDT 255.51124.

71070.

2

  EBIDTA 263.2 690.81070.

2  OTHER INCOME 52.1 39.1 41  DEPRECIATION 47.4 105.5 117.7  EBIT 267.8 624.4 993.5  INTREST 143 345.1 365.2  OTHER ITEMS 0.7      PBT 124.1 279.3 628.4  TAX 42.8 90.9 207.4  PAT 81.3 188.4 421  APAT ( adjusted pat) 84.2 132.4 278.6

Interpreting the balance sheet of Phoenix Mills Ltd.

Source: Income statement of Phoenix Mall

PHOENIX MALL INCOME DETAIL

 TOTAL

RENTAL

RECOVERIES( CAM & OTHER

) TOTALACTUA

L

YEARASSUMING 40%

OF RENTALRECOVER/YR

   48.5

2014 412.28 164.9 577.20 62.72015 441.01 176.4 617.42 25.32016 472.52 189.0 661.53 57.12017 505.74 202.3 708.03 193.6

PHOENIX MALLS RENTAL DATA : 2014-2017

  2015 2016 2017

EXPECTED DEBT 3313.2 3213.2 3063.2REITS 1750 1750 1750DEBT AFTER REITS 1563.2 1463.2 1313.2       

ESTIMATED FINANCIAL ANALYSIS

This much debt would directly be converted into REIT and shall reduce the

burden on Phoenix Mills and also get the Liquidity, thus reducing several risks

for them

Estimated balance sheet

( after REITS)

         2015 2016 2017share capital 29 29 29Reserves 1973.4 2342.2 2771.9Total Shareholders fund 2002.4 2371.2 2800.9long term Debt 1563.2 1463.2 1313.2Short Term Debt 42.9 42.9 42.9Total Debt 1606.1 1506.1 1356.1Deferred Taxes -85.8 -85.8 -85.8Total sources of Funds (      Incl. other sources ) 3522.7 3791.5 4071.2       Total current Liabilities      Net current Assets             

ESTIMATED BALANCE SHEET: 2015-2017

  2016 2017INVESTMENT 1750 1750RENTAL INCOME 472.5 505.74OTHER INCOME 189.0 202.30TOTAL INCOME 661.53 708.03EXPENSES 52.9 56.64267132PBITDA 608.61 651.39PBT 572.09 612.3072769TAX 188.79 202.0614014PAT 383.30 410.2458755     ROI 0.219028786 0.234426215     

ESTIMATED BALANCE SHEET OF REITs

OPERATING, MAINTENANCE & SECURITY 5%UTILITY EXPENSES & OTHER   3%

 Total 8%

DEPRECIATION   6%INTREST   0TAX   33%

Other expenses considered for REIT balance sheet

The above model which was worked out proves that if conditions are

favorable as assumed in this scenario, REIT would yield much better and

would be one successful source of investment for the common people and

also a good option for the Developers, as their financial conditions would

not just improve, but they would get good liquidity as fast as possible

The Return on Investment we achieved in first 2 years of REITs, (2016,

2017) is around 21.9%, 23.4% respectively, which is less than the Return to

Shareholders by their estimates which was 26%. The REIT is thus able to

give almost 22.75% yield, which is far more than the secure yield of 8-10%

in general securities market and 12-15% in equity mutual fund markets.

Conclusion

REITs in the above case are a better option for following reasons:-

i. Fast liquidity to the Phoenix Mills Ltd.

ii. No Debt, i.e. no loans from Banks, Financial Institutes etc.

iii. Professionalism and transparency in the investments.

iv. More no. of small investors, (smaller ticket size, more the investors).

v. As REITs would be less risky for investors, as compared to Stock Market ,

and also better returns can be achieve

1.

2. SEBI introduces REIT in India- issues draft SEBI (Real Estate Investment Trusts) Regulations,

CS Vinita Nair ,October 16, 2013

3. Singapore Real Estate Investment Trusts (S-REITs) , Nidhi Bothra, 28th November, 2013

4.

5. Real Estate Sector – The India Story Submitted by Miss Sonia Sahni , Asst Manager Corporate

and Investment Banking, ABN AMRO Bank , Team Lead - IBM global services

6.

7. The impact of REITs on Asian economies , Ken Atchinson and victor Yeung, April 2014

8.

9. The Growth of J-REITs in the Japanese Real Estate Market and Real Estate Investment

Structures: An Overview, PriceWaterhouseCoopers

References

10. REIT Foreign and Indian scenario, anonymous writer 11. The REIT Structure article by Linklaters 12. An Overview of Asian REITs Development: Performance and Existing Problems Analysis, Guannan YU, 2009 13. Phoenix mills ltd annual report 2014-2015 14. HDFC Institutional Research report, July 2014 15. Phoenix mills report, exapanding our asset class, Investor presentation ,FY 2014 16. Think India, Think retail, Report by Knight Frank, 2015

17. A beginning for REITs in India – SEBI finalizes REITs regulations, Nidhi Bothra and

Vinita Nair, 12th August,2014

18. Analysis of REIT regulation KPMG, Knight Frank, NAREDCO, March 2015

THANK YOU