need of reit and its prospective implication in india- phoenix mall case study
TRANSCRIPT
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