Detailed Rationale

CRISIL Ratings has revised its outlook on the corporate credit rating of Brookfield India Real Estate Trust (BIRET) to ‘Stable’ from ‘Negative’ while reaffirming the rating at ‘CRISIL AAA’. The rating on the commercial paper programme has been reaffirmed at ‘CRISIL A1+’.

 

The outlook revision reflects expectation of continued improvement in the business and financial risk profiles of the real estate investment trust (REIT) over the medium term primarily driven by gradual increase in occupancy coupled with leasing at better rental rates.

 

BIRET owned and operated an area of 209.5 lakh square feet (sq ft) as on June 30, 2024 (excluding the recently acquired Bharti assets), with committed occupancy of 82% (up from 80% as on December 31, 2023, on same-store basis). This is primarily driven by an increase in occupancy in the erstwhile SEZ (special economic zone) areas, with the trust successfully getting around 6 lakh sq ft denotified post amendments to the SEZ Act. Of its total operating area, 162.2 lakh sq ft is under the SEZ, wherein occupancy is lower at 79%, though improved from 76% as on December 31, 2023.

 

The quality of the portfolio stands further enhanced with the recent acquisition of 50% stake in Rostrum Realty Pvt Ltd (RRPL; which has three wholly owned subsidiaries), collectively having five assets (two assets in RRPL and three assets with the three subsidiaries), from the Bharti group with leasable area of 32.9 lakh sq ft and committed occupancy of 93%. The remaining stake in RRPL will remain with the Brookfield group’s private funds and BIRET will have the right of first offer to acquire the stake on or after April 28, 2026. The transaction value was Rs 6,000 crore (BIRET's economic share being Rs 3,000 crore) and equity consideration of Rs 1,228 crore was paid through a preferential issue to the Bharti group at Rs 300 per unit.

 

Occupancy after the addition of these assets stood at 84% as on June 30, 2024. Effective economic occupancy, after incorporating income support from the Brookfield group for the REIT’s Candor Gurgaon One Realty Projects Pvt Ltd (G1) asset, remains healthy at 88%. The occupancy is expected to improve to 87-89% by the end of this fiscal, supported by a strong leasing pipeline of around 30 lakh sq ft and limited expiries of around 12 lakh sq ft over the next three quarters. Furthermore, BIRET has applied for denotification of around 9 lakh sq ft of gross leasing area, out of which it has received in-principle approval for 4 lakh sq ft.

 

While average rentals remained stagnant for the portfolio due to some expiries, rental escalations are happening as per contracts and BIRET has entered into new agreements for 1.9 lakh sq ft at around 19% higher rentals and renewed 0.5 lakh sq ft at around 7% higher rentals in the last quarter. The impact of this will be visible in average rental from the next quarter.

 

While the CRISIL Ratings-sensitised loan-to-value (LTV) ratio remains around the threshold of 40%, no major additional debt is expected leading to gradual improvement in LTV. A low LTV ratio protects investors from the risk of decline in property prices or operating underperformance and its impact on refinancing. Debt service coverage ratio (DSCR) is expected to remain adequate throughout the tenure of the debt, including additional financing for capital expenditure (capex) and asset upgrades. Debt is expected to be refinanced sufficiently prior to chunky repayments due beyond fiscal 2027. Liquidity in the form of debt service reserve account (DSRA) of at least 1-2 months of peak debt obligation is to be maintained throughout the debt tenure. Cash and equivalent stood at Rs 433 crore (excluding DSRA) as on June 30, 2024. Any significant increase in debt without commensurate improvement in income or cash flow can impact the profile and will be a key rating sensitivity factor.

 

BIRET is sponsored by BSREP India Office Holdings V Pte Ltd (part of the Brookfield group). The REIT owns 11 companies, of which 10 own and operate 11 commercial office assets and a retail mall, and the remaining is the operational service provider. BIRET has entered into an option agreement under which it can acquire the entire share capital of G1’s property manager, Mountainstar India Office Parks Pvt Ltd (MIOP), on a fully diluted basis for Rs 150.4 crore, in accordance with the terms of the option agreement.

 

The ratings continue to reflect the trust’s stable revenue profile, benefits from geographical diversification and adequate ability to refinance owing to comfortable financial risk profile. These strengths are partially offset by susceptibility to volatility in the real estate sector, resulting in fluctuation in rental rates and occupancy.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BIRET and its underlying special-purpose vehicles (SPVs), in line with its criteria for rating entities in homogeneous groups. This is because BIRET will have direct control over its SPVs and will support them in case of any exigency. After debt servicing in an SPV, excess cash flow may be made available for debt servicing of other SPVs, which may require support. The SPVs have to mandatorily distribute 90% of their net distributable cash flow (after servicing debt) to BIRET in proportion to the shareholding of BIRET. Also, as per the Securities and Exchange Board of India (SEBI) REIT Regulations, 2014, the cap on borrowing of BIRET has been defined at a consolidated level (equivalent to 49% of the value of the trust’s assets).

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Moderate LTV ratio supports ability to refinance: With the addition of RRPL, consolidated external gross debt increased to Rs 12,600 crore (considering 50% of debt in RRPL assets) as on June 30, 2024, from Rs 10,722 crore as on December 31, 2023. The CRISIL Ratings-sensitised LTV ratio remains around the threshold of 40% and with no major additional debt expected, the ratio is expected to improve gradually. A low LTV ratio protects investors from the risk of decline in property prices or operating underperformance and its impact on refinancing. Any significant increase in debt without commensurate improvement in income or cash flow can impact the profile and will be a key rating sensitivity factor.

 

• Adequate debt protection metrics: The DSCR is expected to remain adequate throughout the tenure of the debt, including additional financing for capex and asset upgrades. Debt is expected to be refinanced sufficiently prior to chunky repayments beyond fiscal 2027. Liquidity in the form of DSRA of at least 1-2 months of peak debt obligation is to be maintained throughout the debt tenure.

 

• Stable revenue profile of the asset SPVs: BIRET owned and operated 209.5 lakh sq ft as on June 30, 2024 (excluding the recently acquired Bharti assets) with committed occupancy of 82% (up from 80% as on December 31, 2023 on a same store basis). This is primarily driven by an increase in occupancy in the erstwhile SEZ areas, with the trust successfully getting around 6 lakh sq ft denotified post the amendments to the SEZ Act. Of the total area, 162.2 lakh sq ft was SEZ area, wherein occupancy is lower at 79% (though improved from 76% as on December 31, 2023). The quality of BIRET’s portfolio stands further enhanced with the recent acquisition of 50% stake in four assets of the Bharti group with total leasable area of 33 lakh sq ft and committed occupancy of 93%.

 

Occupancy after addition of these assets stood at 84% as on June 30, 2024. Effective economic occupancy, after incorporating income support from the Brookfield group for the REIT’s G1 asset, remains healthy at 88%. The occupancy is expected to improve to 87-89% by the end of this fiscal, supported by a strong leasing pipeline of around 30 lakh sq ft and limited expiries of around 12 lakh sq ft over the next three quarters. Further, BIRET has applied for denotification of around 9 lakh sq ft of gross leasing area, of which it has received in-principle approval for 4 lakh sq ft.

 

While average rentals remained stagnant for the portfolio owing to the impact of some expiries, rental escalations are happening as per contracts and BIRET has entered into new agreements for 1.9 lakh sq ft at around 19% higher rentals and has renewed 0.5 lakh sq ft at around 7% higher rentals during the last quarter. Impact of this will be visible in average rentals from the next quarter. The portfolio has mark-to-market upside given the superior asset and service quality, favourable location in prime areas of Mumbai, National Capital Region (NCR) and Kolkata, with good demand and competitive rental rates.

 

Weakness:

• Susceptibility to cyclicality in the real estate sector: Rental collection remains susceptible to economic downturns, which may constrain the tenant’s business risk profile and, therefore, limit occupancy and rental rates. With the top 10 tenants and sectoral (information technology [IT] and IT-enabled services) concentration of rentals at 32% and 24%, respectively, as on June 30, 2024, revenue concentration risk persists. Furthermore, leases accounting for ~22% of rental revenue will be due for renewal between the second quarter of fiscal 2025 and fiscal 2027. While the majority of tenants are established corporates and may continue to occupy the property, any industry shock leading to vacancies may make it difficult to find alternate lessees within the stipulated time, as witnessed over the past few quarters. This could adversely impact cash flow and hence will be a key rating sensitivity factor.

Liquidity: Superior

Liquidity will remain strong over the medium term as the trust has low principal repayments in the next three fiscals and cash flow will be sufficient to meet debt obligation. Liquidity is supported by DSRA of ~Rs 155 crore (1-2 months of peak debt obligation in SPV loans) and cash and bank balance of ~Rs 433 crore as on June 30, 2024. Furthermore, a moderate LTV ratio enhances the financial flexibility.

Outlook: Stable

CRISIL Ratings believes BIRET will continue to benefit from the quality of its assets over the medium term.

Rating sensitivity factors

Downward factors:

• Weakening of operating performance leading to lower-than-expected occupancy levels
• Significant rise in debt resulting in CRISIL Ratings-sensitised LTV ratio increasing above 40% on a sustained basis
• Significant delay in completion and leasing of under-construction assets or acquisition of assets of lower quality affecting the portfolio health
• Any impact on the independence of the operations of BIRET due to, but not limited to, change in sponsorship of the trust or ownership of the BIRET’s manager

About the Trust

BIRET is registered as an irrevocable trust under the Indian Trusts Act, 1882, and as a REIT with SEBI’s REIT Regulations, 2014, as amended.

 

Shantiniketan Properties Pvt Ltd (N1) owns and operates a commercial office park, Candor Techspace N1, in Noida. The property has been operational since January 2011 and has completed area of 19.9 lakh sq ft, of which 97% was occupied as on June 30, 2024, while additional area of 8.6 lakh sq ft is expected to be developed in the long term.

 

Candor Kolkata One Hi-Tech Structures Pvt Ltd (K1) owns and operates:

An SEZ park, Candor Techspace G2, in Gurugram. The property has been operational since 2011 and has completed area of 39.4 lakh sq ft, of which 76% was occupied as on June 30, 2024, while an additional 1.7 lakh sq ft is expected to be completed over the medium-to-long term.

 

Candor Techspace K1 in Kolkata, which is part SEZ and part commercial office park. The property has been operational since 2008 and has completed area of 31.6 lakh sq ft, of which 89% was occupied as on June 30, 2024. An IT park and mixed use-led development worth additional area of 5.8 lakh sq ft is under construction, while 21.1 lakh sq ft is expected to be developed over the medium-to-long term.

 

Festus Properties Pvt Ltd (Kensington) owns and operates an SEZ park, Kensington, in Mumbai. The property has been operational since 2009 and has completed area of 16 lakh sq ft, of which 95% was occupied as on June 30, 2024.

 

Seaview Developers Pvt Ltd (SDPL) owns and operates N2 in Noida. The property has been operational since 2011 and has completed area of 38.2 lakh sq ft, of which around 78% was occupied as on June 30, 2024, while an additional 7.7 lakh sq ft is expected to be completed over the medium-to-long term. BIRET acquired the asset on January 24, 2022.

 

Kairos Properties Pvt Ltd (Kairos; erstwhile Kairos Property Managers Pvt Ltd) owns and operates a portfolio of nine commercial properties in Mumbai spread across three clusters totalling 27.4 lakh sq ft, of which around 89% was occupied as on June 30, 2024.

 

G1 owns and operates a commercial office park, Candor Techspace G1, in Gurugram. The property has been operational since 2012 and has completed area of 37 lakh sq ft, of which around 69% was occupied as on June 30, 2024, while an additional area of 1.0 lakh sq ft is expected to be completed over the medium term.

 

RRPL and its subsidiaries, Arnon Builders & Developers Ltd, Aspen Buildtech Ltd and Oak Infrastructure Developers Ltd, own and operate a 32.9 lakh sq ft commercial portfolio primarily located in Delhi-NCR with occupancy of 93% as on June 30, 2024. Its assets include:

• Airtel Centre in Gurugram has leasable area of 6.9 lakh sq ft and was 100% occupied as on June 30, 2024.
• Pavillion Mall (retail mall) in Ludhiana, Punjab, has leasable area of 3.9 lakh sq ft and was 86% occupied as on June 30, 2024.
• Worldmark Gurugram, located in Gurugram, has leasable area of 7.5 lakh sq ft and was 92% occupied as on June 30, 2024.
• Worldmark Delhi constitutes of three assets which have leasable area of 14.5 lakh sq ft and was 91% occupied as on June 30, 2024.

 

Candor India Office Park Pvt Ltd (CIOP) is engaged in property management, facility management and support services for assets owned by N1, SDPL, K1 and Kairos. This entails services such as accounting, procurement of materials and services, supervision of annual maintenance contracts and insurance, transition, operations, supervision of repairs and maintenance, and legal, secretarial and compliance services.

Key Financial Indicators*

Particulars	Unit	2024	2023^
Revenue from operations	Rs crore	1781	1197
Profit after tax (PAT)	Rs crore	-3.9	131
PAT margin	%	-0.22	10.9
Adjusted gearing	Times	0.98	0.65
Interest coverage	Times	1.5	1.9

*CRISIL Ratings-adjusted numbers

^Key financial numbers do not include financials for G1 and Kairos acquired in August 2023

Any other information: Not Applicable