DLF may bring some office assets under Reits

DLF, the country’s largest property developer, is looking to bring some office assets under real estate investment trusts (Reits), an official said on Friday, in an analyst conference call.

Reits are pooled investment vehicles for this sector. They are tax-efficient, distributing 90 per cent of the income as dividend.

DLF has been selling non-core assets for quite a while to cut debt but its net debt rose from Rs 18,526 crore in the fourth quarter of 2013-14 to Rs 19,064 crore in the first quarter of 2014-15. This was mainly due to the Rs 240 crore on capital expenditure and government charges, and negative operating cash flow of Rs 320 crore.

“When sales pick up, the debt will decline,” said Saurabh Chawla, executive director. The expectation is for a sales booking of Rs 3,000-3,500 crore this financial year.

As for Reits, the finance minister gave a tax “pass through” status in the Budget. This means the income will be taxed at the hands of retail investors and not at the fund level. The Securities and Exchange Board of India is yet to issue the final rules.

“We are studying the proposals. We will not be the first off the block but it is high on our agenda to take certain assets under Reits,” said Chawla.

DLF has 28 million sq ft of leased assets and will be one of the biggest beneficiaries of Reits, said analysts. “Since Reits buy office assets from developers, they (latter) can use the money to repay debt,” said an analyst.

DLF is looking to issue a number of commercial mortgage-backed securities (CMBS) for its Special Economic Zones (SEZs), which would reduce its interest costs. In CMBS, the principal payment is to be made at the end of the tenure of the loan and they carry lower interest rates.

DLF plans to raise Rs 3,500 crore through CMBS in one of the large SEZs and to issue CMBS in a few other projects of smaller size, said Chawla.

It had completed the country’s first CMBS issue in the last quarter of 2013-14, raising Rs 900 crore through the issuance on DLF Emporio and DLF Promenade, two of its malls in Delhi. The Emporio CMBS carried an interest rate of 10.9 per cent.

Analysts said CMBS and Reits would help DLF achieve better capital efficiency.

“With no visible improvement in the core residential business, DLF continues to be reliant on asset sales to keep debt in check. With no large launch in the first half of FY15, DLF will need to launch projects in the second half,” said Adhidev Chattopadhyay, an analyst with HDFC Securities.

He said sales fell 25 per cent over a year in the first quarter of this financial year, in the absence of new projects and sluggish sales in ongoing ones.