IRB InvIT - A Better Approach

03-05-2017 06:42:04

These are exciting times for the institutional real estate investors in India. The sector has seen several landmark regulatory changes in the last 2 years, which I believe will fundamentally change the character of the industry in the next decade. Although, I must confess, the changes I see happening in the sector are very different from the general opinion of the experts.

First big regulation is RERA (short for Real Estate Regulation Act). The act, while good on paper, has negative implications for builders and may end up impacting the supply of residential real estate across country. Most likely, the ever creative real estate builders in our country will find a way around it, or the states may end up diluting the provisions of the laws, so net change will be marginal, if not, buyers must prepare to pay higher prices for real estate, which of course will result in dampening demand.

The second one related to REIT, is a big plus though. Commercial real estate yields in India are still 300-400 basis points higher than most developed countries, making them attractive assets in a yield starved world. With mutual funds and banks in India now allowed to invest in REITs and several macro tailwinds supporting the office sector in India (Make in India et al), REITs should become popular (rightly so, given how some of the largest international real estate funds are aggressively supporting the thesis). However, the conundrum is easy to see - the positive impact of REIT regulation viz-a-viz the stifling norms of RERA (for builders) will end up pushing capital towards commercial real estate projects. In the medium term, commercial real estate will see more demand, yields will get compressed, however in the long term, the same reasons may end of creating a bubble, pushing the story too far (akin to Soros’s famous “reflexive” theory)

Coming to the topic at hand - IRB InvIt is expected to list in a few days. It will be first infrastructure REIT listing in India and as expected, many investors are watching this listing very carefully. I am quite wary of infrastructure companies in India as an investor (do you know any non "connected" promoter running an infra company?). So far the marketing teams have done the promotion well and given several heavy weight anchors behind the IPO, the issue should be received well. However, rather than applying for the issue (priced at 20X TTM earning, just like any solid IT company), I think there is a better way to play the listing. IRB infra, the parent of the proposed InvIT, is listed and owns 75% of the InvIT now. A 20% pop in the price of the InvIt post listing will bump up the NAV of IRB accordingly. How about buying IRB futures or even better, out of money IRB calls? As the listing price pops, so will the call price. I am cagey about investing in infra companies for long term, however, as a one month play, this doesn't seem like a bad option.