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Managing Indian REITs The Conventional Wisdom
International Research Conference II
Securities & Exchange Board of India (SEBI)Mumbai | March 20th 2015
Presenter:
Prashant Das, Ph.D.Assistant Professor of Real Estate Finance
With inputs from
Charles Thomas Jr., Ph.D., CPA, CMA
Ecole hôteliere de Lausanne, SwitzerlandRoute de Cojonnex 18, 1000 Lausanne 25, Switzerland
1 | © Prashant Das, Ph.D.
Opinions expressed and errors, if any, are personally of the presenter.
Agenda
• The Story of REITs
• I-REITs
• Conventional Wisdom
• Opportunities & Challenges for I-REIT Management
‹#› | © Prashant Das, Ph.D.
Buying a Piece of Empire EstateESRT: Market Cap (Jan 2015): $1.87B
© Prashant Das, Ph.D. | EHL Lausanne, Switzerland
Image Source: libertyunyielding.com
Stock Data: Yahoo! Finance
ESRT
S&P 500’
Oct 2013 – Jan 2015
ESRT
Institution Name Empire State Realty Trust, Inc.
Total Assets (Mi US$) 2,476,061
Total Liabilities (Mi US$) 1,472,876
Total Equity (Mi US$) 1,003,185
Common Equity (Mi US$) 385,158Common Equity (Mi US$) 385,158
Total Preferred Equity (Mi US$) 0
© Prashant Das, Ph.D. | EHL Lausanne, Switzerland
REITs: USA versus India
© Prashant Das, Ph.D.
Source: maxizoo.ieSource: pixshark.com
Investor-centric versus investment-centric
Intro. Total (Count) Insider (avg %) Float (Avg %) Inst. Own. (avg %)
USA 1960 186 9 91 76
Netherlands 1969 5 19 81 48
Australia 1971 26 17 83 42
Canada 1993 47 14 86 23
Belgium 1995 11 40 60 11
Turkey 1995 7 67 33 7
Greece 1999 1 64 36 25
Japan 2001 44 10 90 44
Singapore 2002 33 32 68 22
France 2003 18 50 50 29
Evolution of REITs and Their Ownership Structure
© Prashant Das, Ph.D.
France 2003 18 50 50 29
Malaysia 2004 5 46 54 40
Hong Kong 2005 8 43 57 16
Germany 2007 3 20 80 29
Italy 2007 2 54 46 23
UK 2007 32 16 84 60
Spain 2009 4 6 94 65
Finland 2010 1 34 66 8
Mexico 2011 7 12 88 18
UAE 2011 1 0 100 14
Ireland 2013 3 10 90 64
South Africa 2013 14 18 82 43
TOTAL (%) 461 17 83 51
Source: SNL & authors
Ownership Structure of Indian Real Estate Companies
40
50
60
70
80
90
100
40%
50%
60%
70%
80%
90%
100%
© Prashant Das, Ph.D.
0
10
20
30
0%
10%
20%
30%
Float Insider Institutional Source: SNL & authors
Potential I-REIT Candidates
• Commercial Real Estate in India:
– Large number of properties held by foreign REITs and non-
REITs (Offices, healthcare, and retail)
– Several hundreds are operated by listed companies
(Hotels, apartments, offices, and retail)(Hotels, apartments, offices, and retail)
• Natural targets for conversion to IREITs, alongwith
established RE developers and international funds
© Prashant Das, Ph.D.
Structure of I-REITs (REITs in India)
Sponsor
Trust ManagerAppoint & scrutinize
SEBI
liais
on
© Prashant Das, Ph.D.
Auditor
Appraiser
Inv. Banker
Shareholder
Pro
tect
the b
en
efi
ts
Distribute + liaison
I-REIT Features
Ownership, Activities & Assets
• Must be publicly traded and listed
• Insider ownership
– sponsor must hold between 25% and 75%
– Responsible management versus entrenchment
• SPV assets must mimic the REITS’• SPV assets must mimic the REITS’
– Taxable REIT subsidiaries?
© Prashant Das, Ph.D.
I-REIT Features
External Management• Management vs. Advisory
• Internal advisory is sought after; not management
– Over 60% of REITs globally are internally advised
– Nearly 50% of REITs are internally managed
• External advisors
– Reluctance from sponsors (dilutes control)
– Costly; but bring-in expertise
– Impact on performance: ambiguous
– Prevalent if high corruption and poor property rights(Cashman et al., 2014)
‹#› | © Prashant Das, Ph.D.
Are REITs Real Estate?
Stocks are from Mars, Real Estate from Venus
The Nature of REITs
– Stock, commercial RE, or a mixture?– Stock, commercial RE, or a mixture?
– Academic Debate
– Difference of perception before and after the
economic crisis (Das et al., 2015)
‹#› | © Prashant Das, Ph.D.
Financing REITs
• Major shift in financing approach
– Rental assets are LT collateral
• Debt contracts are simpler
– Key challenge is availability of equity, not – Key challenge is availability of equity, not
cost of debt (Chinloy, Das & Wiley, 2014)
• 49% cap on leverage
– Majority of capital must come from equity
– Liquidity issues for early I-REITs
‹#› | © Prashant Das, Ph.D.
Indian RE Development Firms are
Increasingly More Leveraged:
20
40
60
80
100
%
Debt/Enterprise Value
MIN
Average
MAX
‹#› | © Prashant Das, Ph.D.
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0
20
40
60
80
100
120
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
%
Secured Debt / Property Value
MIN
Average
MAX
Source: SNL & authors
Preferred Equity is not allowed in I-REIT
10,000.0
100,000.0
Sca
le
Th
ou
sa
nd
s
Preferred Equity RE Developers in India
‹#› | © Prashant Das, Ph.D.
1.0
10.0
100.0
1,000.0
2014Y 2013Y 2012Y 2011Y 2010Y 2009Y 2008Y 2007Y 2006Y 2005Y
Lo
ga
rit
hm
ic S
ca
le
Average
MAX
Source: SNL & authors
Creating Shareholder Value
© Prashant Das, Ph.D.
Internal Growth
8
10
12
14
16
Dividend Yield of Publicly-Traded RE Developers in India
MIN
© Prashant Das, Ph.D.
0
2
4
6
8
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
%
Average
MAX
Source: SNL & authors
Free Cash Flow
20
40
60
80
Free Cash Flow Coverage
© Prashant Das, Ph.D.
Source: SNL & authors
-100
-80
-60
-40
-20
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Mult
iple MIN
Average
MAX
External Growth
• Capital Gains
– Is this sustainable Business model for REITs?
– Capital constraints in recycling assets
• Leverage is capped• Leverage is capped
• 90% distribution
• Improve NAV ?
– REITs generate value from Income return (Mühlhofer,
2013)
© Prashant Das, Ph.D.
Challenges to REIT Managers in India
100
200
300
400
500
600
700
800
Mult
iple
Price/NAV for Publicly-Traded Real Estate Developers in India, 2006-14
MIN
Average
MAX
© Prashant Das, Ph.D.
0
100
2006 2007 2008 2009 2010 2011 2012 2013 2014
0
20
40
60
80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Mult
iple
Price/EPS for Publicly-Traded Real Estate Developers in India, 2005-14
MIN
Average
MAX
Source: SNL & authors
Opportunities for REIT Managers in India
• Market inefficiency– Real estate in inefficient in general
– Data wizardry may offer an edge: predictability
• IFRS vs. US-GAAP: • IFRS vs. US-GAAP: – BV vs. MV narrower with IFRS?
– Improved performance legibility
• Growth Potentials– Increased appetite for space markets?
– Degrading affordability in asset markets?
‹#› | © Prashant Das, Ph.D.
Questions?
Thank you
© Prashant Das, Ph.D.
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© Prashant Das, Ph.D.
References (cont.)• Clayton, J., & MacKinnon, G. (2003). The Relative Importance of Stock, Bond and Real Estate Factors in
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© Prashant Das, Ph.D.
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© Prashant Das, Ph.D.
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Modelling and Simulation Society of Australia and New Zealand Inc.
© Prashant Das, Ph.D.
