Should you look to invest in the Mindspace REITs IPO?

The Mindspace REITS IPO opens on the 27 July and the issue closes on 29 July. Priced at Rs.274-275, Mindspace REITS has already raised Rs.1519 crore from anchor investors. In addition, it has commitments worth Rs.1125 crore from strategic investors. That means; nearly 60% of its Rs.4500 crore is already tied up. What is the base case for the IPO.
Key drivers for the IPO

The REITS IPO will give investors the opportunity to participate in a portfolio of commercial property. The minimum investment is Rs.50,000 per application, which means investors can get access to a diversified portfolio of realty with a nominal investment. Mindspace has an overall property portfolio with a value of Rs.23,000 crore spread across 29.50 million SFT. The current occupancy rate of 88% is likely to go up to 92% in the next couple of years. Mindspace has enjoyed 12-15% price escalation during each 3-year renewal and that is likely to contribute substantially to the future growth of the business.

Another trigger could be that market rentals of most of the properties are nearly 15-20% higher and that could also lead to better yields as rentals tend towards market rates. The REIT still has around 6.5 million SFT of commercial property which is now being developed and that also become a value enhancer. At a macro level, the big driver for the REITS issue could be the post-COVID pick-up in GDP growth, which could lead to fresh demand.

How it compares with Embassy

Currently, if you want to benchmark the Mindspace REITS IPO, the nearest analogy would be the Embassy REITs that came out with an IPO in mid-2019. Unlike Embassy, that is 55% reliant on Bengaluru, Mindspace has spread its bets almost equally between Mumbai and Hyderabad and is building franchise in Pune and Chennai. Embassy has MNCs accounting for 78% of its client base while Mindspace has MNCs making up 86% of its overall client base. In fact, Mindspace has also substantially reduced its reliance on the technology sector at 44%. Embassy still has a 50% exposure to the technology sector making it overly dependent on IT.

Should you look at REITs IPO?

The REITs IPO is special for 2 reasons! Firstly, Mindspace will only be the second listed REITs in India after the Embassy group. That will create scarcity value for the REIT. Secondly, it offers a good opportunity for investors to spread their portfolio risk by allocating a part of their money into real estate. Unlike, the traditional real estate investments, this is less sticky and also more liquid. Also, considering that the REIT is obliged to distribute 90% of its distributable surplus every 6 months, investors will be assured of regular returns. The only caveat is that REITs must be seen as a long term bet of 5-7 years and the expectations must be rational!