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ICRA assigns provisional AAA rating to Embassy REIT

Embassy Office Parks REIT is the first SEBI registered REIT to file draft offer documents for a public listing in India.

ET Online|
Sep 24, 2018, 06.36 PM IST
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The REIT regulations impose certain restrictions on the operational and financial profile of a REIT, which favourably impact their credit profile.
Credit rating agency, ICRA has assigned rating of Provisional (ICRA)AAA with stable outlook to the first Real Estate Investment Trust (REIT) to be launched in India. Sponsored by entities belonging to Blackstone group and Embassy Property Developments Private Ltd, Embassy Office Parks REIT (Embassy REIT) is the first SEBI registered REIT to file draft offer documents for a public listing in India.

Commenting on the rating, Mr. Shubham Jain, Group Head at ICRA says, “The assigned Provisional [ICRA]AAA rating draws strength from the large and diversified leasing portfolio of Embassy REIT, which is spread across multiple office parks in different cities. The business profile is further enhanced by the diversified tenant base in the office parks, which comprises of leading multi-national and domestic corporations. The rating also benefits from the low initial leverage in the REIT group, which will be aided by prepayment of outstanding using the net proceeds from REIT listing. The launch of the first Indian REIT is a key milestone in the evolution of the Indian commercial real estate segment and will spur further investor interest in the sector.”

ICRA’s credit assessment of a REIT is based on a consolidation of the business and financial risk profile of the REIT with that of its special purpose vehicles (SPVs). Moreover, the REIT regulations impose certain restrictions on the operational and financial profile of a REIT, which favourably impact their credit profile. These include mandatory distribution of 90% of the available free cash flows at SPV level, cap on under-construction area in the portfolio to 20% by asset value, and limit on permissible leverage to 49% of asset value.

REITs in India are governed by the SEBI Real Estate Investment Trust Regulations, 2014, as amended from time to time. They act as vehicles for owning and operating revenue generating real estate assets and distributing cash flows from them to the unit holders.

REITs provide an avenue for retail as well as institutional investors to participate in real estate ownership and are an established asset class in overseas markets like the US, Singapore and Japan. Sponsors can use REITs to monetize their developed assets and unlock capital which can be deployed towards future projects. The unit holders in the REIT benefit through favourable tax treatment on the income generated by the REIT assets, which is distributed to them on pass-through basis.

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