The REIT IPO by Embassy Office Parks would have been fully subscribed by the time you read this, so this article is not likely to be of much use, but here are my 2 cents.

Caveat: I have not invested, and will not be putting my money in this IPO. You must perhaps know that I never put money in an IPO, and prefer a market price discovered product. Another caveat is that I do not know much about the rental market for commercial real estate. I do know that residential real estate market is really poor and yields are south of 2%, and hence not attractive.

Coming to the REIT itself, I am surprised that people like Blackstone want to get rid of assets with 8.25% yield. I would hug it. I would rather create instruments which I could place with the mutual fund industry, or do an IPO of debt. I may not be able to get such yields on good quality tenants – with a rising rent agreement – why would I wanna share it? I have no clue.

So I asked a friend in Lower Parel and he said that over the past 4 years in his building rents have not gone up. He also said that he is using a small office – maybe 5k sft whereas another BFSI company was using about 40k sft. When I checked I found that the bfsi company had got discounts – not very significant, but the maintenance charges were waived off last year for a 3 year renewal. Not bad, but not rising rents. Like I said I have very little knowledge and I am not willing to say anything about the offer. I can only say “I do not know”, and I am not investing.

I found the brokerages not wanting to commit either side. I do not have too much respect for the research skills of the big brokerage houses – Icici and Hdfc. The Icici securities view is “subscribe” – but remember they did their own OFS at Rs. 520, and I recently bought it at 220, 199, and 210. Sold off everything at 259. My selling price was HALF of their Ofs Price. No, it does not say much for their valuation skills. Ditto for Hdfc Securities – they are talking of a weighted average portfolio of 7 years. Long agreements too go for negotiations, and one is always worried about a ‘put’ and ‘call’ options in long term debt agreements. I do not have access to such data.

Smaller businesses are struggling to survive, so it has to be big tenants. Will the big companies – like say Mutual funds, life insurance companies, etc. be looking for more RE today? what about banks – say banks like IDFC Capital First – will they be looking for more space?

Who will want to rent offices at 8.25% rents? will it be the FII? the Venture capital companies? start ups? I do not know. If I need an office for 10 years plus and my cash flows are decent, will I buy or rent? Well the RE companies tell me that people will buy, and one RE giant says “rental models are making money for them”. It is your call.

I only hope that such funds should not be used to bail out banks or big builders or big nbfc struggling with lotsa unsold inventory. At least I know of a few IPO which was meant to repay lenders.

I spoke to 2-3 super HNI investors (I mean investible surplus in excess of Rs. 250 crores) – and both of them are subscribing. I was intrigued – and one of them said “FOMO”. She said ” when you exhaust direct equity, mf, pms, aif….and you want to do something big in RE with liquidity also thrown in, I would prefer REIT. She also said that she would be happy to invest say Rs. 25 crores in an office space to rent it out – but was worried about the admin portion of running a RE portfolio. So she said this was just a way of spreading some risk. She was not confident of making money in this transaction, but said “what if it took off say in 2022”? So it was kinda hedge – or call it asset allocation – and not really a return seeking investment.

Like I said, I have no view. I do think there is some merit in her argument that it is a way to outsource RE investment (if you must have it in your portfolio), has some risk of too much supply of new property, looks inefficient – 8% gross yield – take off maintenance charges, taxation, asset manager’s fees…not much is left.

I prefer sitting out and watching.