The pandemic has rekindled a new trend: Financial Independence and Early Retirement (FIRE) among young individuals. However, this requires not just a significant retirement corpus but also sustainable passive income to manage expenses.
To this end, many prefer fixed deposits, whose returns just keep pace with inflation, while many prefer real estate. Real estate investment has dual benefits—one is capital growth, while the other is the rental yield if the property is rented out. However, buying property itself is a costly affair and is out of reach of many.
Having said that, there remains a lucrative way for investors to invest in real estate through Real Estate Investment Trust (REIT). REITs, by nature, are mandated to distribute 90% of their taxable income to unitholders as dividends. In addition, they can also generate returns through capital appreciation.
This makes REIT a preferred choice for many who wish to generate long-term capital growth and steady income. Similarly, in this article, we have selected two of the largest listed REITs by market cap for investors.
#1 Embassy Office Parks REIT
Embassy REIT is sponsored by BRE Mauritius Investments (part of the Blackstone Group) and Embassy Property Development (part of the Embassy Group). It is India’s first publicly listed REIT and Asia’s largest official REIT by area.
The company owns, operates, and invests in rent- or income-generating real estate and related assets in India. It gives investors access to the benefits of real estate investment with the advantage of investing in publicly traded units.
It has 13 commercial properties (office parks and city-centric offices), six hotels (two of which are under construction), and a solar plant. These portfolio of properties is held through various special-purpose vehicles (SPVs).
The company has a total leasable area of 45.4 million sq ft, which has grown by 39% over the last five years during FY20-24. Notably, the company has maintained a strong occupancy ratio of around 85% throughout the period, indicating strong demand.
In addition, the company’s rental income has grown quite steadily during the period. Its average rental rates have grown 38% from ₹68 to ₹87 per square foot per month over the last five years.
This has helped Embassy grow its net operating income (NOI), which measures a property’s profitability, by 64% from ₹18.2 billion (in FY20) to ₹29.8 billion in FY24. Increases in rental income and the acquisition of new properties fueled the NOI growth.
The company has met its distribution guidance every year, even during the pandemic, having cumulatively distributed ₹99 billion since its listing in April 2019.
This implies a 7.1% distribution yield based on the IPO price of ₹300, and including total dividends paid since listing. Moreover, Embassy share price has also delivered a 4.3% annualised return during the said period, translating into an annualized total return of 11.3%.
This did not go unnoticed. Since its listing, the company has seen a 23x growth in unitholders, growing from 4,000 to 91,000 in FY24, potentially looking to earn passive income.
In FY24, it maintained its historical performance, distributing ₹21.33 per unit, down 2% year-on-year, primarily due to increased interest costs and other working capital changes. Still, the yield comes at 6% at a CMP of ₹362.
Talking about the financials, its revenue has grown at a compound annual growth rate (CAGR) of 11.7% to ₹38.2 billion over the last five years. Rising rents and the addition of new properties have driven revenue growth. On the other hand, its profit has grown at a modest rate of 4.7% CAGR to ₹9.6 billion.
Looking ahead, the Embassy REIT’s strategy leverages multiple levers to enhance NOI and provide long-term total returns for unitholders. It seeks to develop 6.1 million sq ft at highly attractive yields over the next 4 years, in Bangalore, India’s best office market.
This has the potential to contribute ₹7 billion to NOI. Furthermore, the company’s rent escalation matches inflation, with a contracted increase of 15% every three years. Thus, 16% of the existing leases in its portfolio have the potential for rent increases when they come up for renewal in the next four years.
This, along with new properties, could be the primary driver for NOI growth, leading to increased distributions to unitholders. Embassy’s net asset value stands at ₹401.6 (as of FY24), suggesting potential undervaluation at CMP, with a price-to-NAV ratio of 0.9x.
ICICI has valued the company at a target price of ₹429 based on 1x Mar’26E NAV- a 19% upside from its current price of ₹362.
#2 Mindspace Business Parks REIT
Mindspace is sponsored by K Raheja Group, a leading real estate development and retail business group. The company has five integrated business parks and five office properties, with a completed leasable area of 26.3 million sq ft (as of FY24).
The company has one of India’s largest Grade A office portfolios, strategically located in well-established office micro-markets. 42.5% of its total area is in the Hyderabad region, followed by Mumbai (37.9%), Pune (16.2%) and Chennai (3.4%).
Its presence in key office markets enables it to deliver strong occupancy rates, with 88.6% of its space leased to tenants under contract.
The company’s diverse tenant base, including major players like L&T, Wipro, and Verizon, ensures long-term stability and contributes to higher occupancy rates.
The company’s rental income has grown steadily over the last two years, ending FY24. During this period, its rental rates increased by 12%, from ₹61.7 to ₹69 per sq ft.
Steady rental growth helped Mindspace NOI grow 27.5% from ₹14.9 billion in FY22 to ₹18.9 billion in FY24. However, the company’s distribution lagged, rising only 3.7% from ₹18.5 in FY22 to ₹19.2 in FY24, translating into a yield of 5.3% at a CMP of ₹360.
Nevertheless, over a slightly more extended period since its listing in August 2020, the company has delivered an annualised return (capital gain and dividend) of 12.4% (as of FY24), cumulatively distributing ₹39.3 billion.
In terms of financials, its revenue grew at a CAGR of 30% to Rs 24.5 billion during FY 21-24. The introduction of rents from new and vacant areas fueled revenue growth. However, its profit lagged, growing at a CAGR of 21% to Rs 5.6 billion due to rising interest and depreciation expenses.
Looking ahead, the company has a strong pipeline of 6.9 million sq ft under construction, which, when commissioned, will help drive its growth. Additionally, Mindspace has a right-of-first-offer agreement with the Raheja Group on 15 million sq ft, which is at various stages of development.
If Mindspace exercises its right, it can provide an additional growth lever. Moreover, 5-8% of Mindspace’s portfolio will expire yearly over the next three years until FY27. This gives it a significant opportunity to increase rentals, directly benefiting unitholders.
Mindspace’s NAV stands at ₹380.5 (as of FY24), reflecting potential undervaluation at CMP, with a price-to-NAV ratio of 0.9x. ICICI Securities values Mindspace at ₹382 per share, 6% higher than CMP.
Conclusion
India’s office sector is in a transformational phase, marked by the evolving dynamics of the modern workplace. The growing use of office space by domestic enterprises, the expansion of global capability centers (GCCs) and the government’s SEZ reforms will significantly boost India’s commercial real estate market.
The increasing growth opportunities position REITs as direct beneficiaries of the potential demand in coming years. This, coupled with robust occupancies, escalation clauses, and 90% compulsory distribution, makes them one of the preferred ways to invest in real estate to generate a passive income.
Disclaimer
Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
About the Author: Madhvendra has been deeply immersed in the equity markets for over seven years, combining his passion for investing with his expertise in financial writing. With a knack for simplifying complex concepts, he enjoys sharing his honest perspectives on startups, listed Indian companies, and macroeconomic trends.
A dedicated reader and storyteller, Madhvendra thrives on uncovering insights that inspire his audience to deepen their understanding of the financial world.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The articles’ content and data interpretation are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.
