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Update on Brookfield REIT IPO

The next upcoming IPO is Brookfield REIT (Feb 3 to Feb 5). We have a positive view on this IPO. 

First a quick primer on what REITS are

What are REITs : In simple words, REITs or Real Estate Investment Trust units are fractional or part ownership of real estate assets which are leased out. This allows a retail investor to have part ownership in a range of properties that otherwise not be possible for the retail investor. Globally as well as in India most REITs are traded on major stock exchanges. The rents collected from the underlying properties are distributed in the form of returns to REIT unit holders

These returns on REITs (based on the rent collected from underlying properties) are of 2 types – 

  1. Dividend – not taxable under section 115BAA
  2. Interest – fully taxable

Thus, while the amount of returns matters, the break-up between dividend and interest is also important to determine post tax returns.

Movements in prices: REIT units are traded on stock exchanges where the price fluctuates with the perceived appreciation or reduction in the underlying property price and other factors such as interest rates

Taxability of realised gains i.e. gains made on sale of REIT units are taxed as capital gains (short term gains at 15% and long term gains at 10%).

What is yield: Yield is

 [Expected returns i.e (dividend + interest) / Purchase price of the REIT unit]

We have a positive view on Brookfield REIT IPO and feel it will open at premium.

If you would like to understand a technical rationale for understanding the reasons behind this positive view, pls do read further but remember we warned you that this gets a little technical 🙂

Comparison of Brookfield REIT with other 2 listed REITs in Indian market

*after adjusting for zero coupon bonds only Embassy has. 

Remember, higher % of distribution as dividend means more tax free income.

While Brookfield has lower proportion of its distribution in the form of tax-free dividend, its overall yield at 7.75% to 8.00% is much higher. Market price post listing is heavily determined by foreign investors who are less sensitive to breakdown of distribution in form of dividend and interest as for them interest is taxed at only 5%. Given strong demand from yield hungry investors and a high yield of 7.75% – 8%, we feel that Brookfield should trade at premium to IPO issue price. 

Applying to Brookfield REIT IPO and selling on listing may (click on link to see our earlier blog on this subject) enhance returns on your liquid funds with limited short-term equity risk.

Staying invested for longer periods is subject to equity and property market risks and returns.

Our view is positive on Brookfield REIT IPO in expectation of a listing gain

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