The Review – 8.15/10 – Good Opportunity
We grade opportunities across 10 criteria (sometimes with sub-criterion) to arrive at an objective review. A quick points summary is followed by a detailed analysis. Format: Criteria – (Score out of/max score possible). Example: Tenant – (1/1)
Less than optimum points are highlighted like this.
- Tenant (1/1)
- Tenant Industry Outlook (0.5/0.5) + Tenant Stickiness (0.5/0.5) = (1/1)
- Asset Grade (1/1)
- Asset Location (1/1)
- Lock-In (0.5/0.5) + Lease agreement registered (0/0.5) = (0.5/1)
- Agreement Duration (0.5/0.5) + Increment (0.5/0.5)=(1/1)
- Rent start date (0/0.5)+ Deposit (0.4/0.5)=(0.4/1)
- Return On Investment ROI (.75/1)
- Capital appreciation (0.5/0.5) + Exit Options (0/0.5) =(0.5/1)
- Asset Manager Credibility (0.5/0.5) Our 2 cents (0.5+0.5) =(1/1)
Total = 8.15/10
Tenants – Company With Strong Fundamentals
- Smart Works is India’s leading Workspace as a Service provider – WAAS. They offer affordable, customised and scalable workspaces, ready to use in 30 days to large enterprises, SME’s and high growth startups.
- Smart Works is profitable and has grown its revenues 3X in 2020-2021. With over 4 million square feet of managed office space and 3,000 crores in revenues, it’s the first Flexi-space provider to have a pan India presence.
- Enterprise clients need state-of-the-art plug-and-play office spaces without incurring heavy capital expenditure on furniture and fixture. So while Smart Works spends that capital expenditure it takes a lock-in from the clients. Smart Works manages the housekeeping, F&B solutions, installation and upkeep of utilities -a hassle-free solution for clients. The difference between the rent they pay to the landlord and the fees they charge clients is their profit. They have an impressive list of clients. Smart Works has further leased this property to Groww – a unicorn in the financial market space.
Tenant Industry Outlook + Tenant Stickiness
- Industries that remain robust during up and down market cycles are recommended. If the tenant is paying lower than or equal to market rentals and spends money (CAPEX) to build furniture & fixture, it’s an ideal scenario as the real cost of shifting is high and therefore the tenant sticks to the property.
- Covid has accentuated the need for distributed offices and low CAPEX. Hence the demand for managed offices is on the rise and SmartWorks is in the right position to capitalise on this opportunity.
- Smart Works has not only invested heavily in the premises (CAPEX) but has taken up the entire wing in the tech park. Hence they leaving our floor (4th) is a lower probability.
Asset Grade – Should Be An A-Grade Asset.
- Spread over 5.6 acres, Vaishnavi Tech Park at Sarajpur junction is thoughtfully designed for IGBC LEED Platinum rating.
Asset Location – Should Be A Business District/SEZ/Industrial Hub With Excellent Travel Infrastructure.
- Located at Ambalipur Village on Sarjapur Road, it’s less than a 10-minute walk from the upcoming Bellandur Metro Station. It has excellent connectivity with the IT corridor of Bengaluru.
Lock-In 3+ Years Recommended And Registered Lease Agreement Recommended.
- The lock-in is 5 years which is ideal but the lease agreement with Smart Works will be registered post the purchase of the property.
Duration – 5+ Recommended. An Increment Of 5% A Year Or 15% Every 3 Years Is Recommended.
- 9-year agreement and 15% escalation every 3 years.
Immediate Rental + 6 Month Deposit Recommended.
- Rental income will start in Aug 2022 and the deposit is at 5 months.
ROI – Rental Income To Be At 8% Net Every Year.
- The average rental yield is lower by .30% @ 7.7%. While office assets give a 7-8% return. Given the competition in the market.
Capital Appreciation For Offices Should Be 5%. Quick Exit Is Ideal And The Hurdle Rate Should Be Above 12%.
- While MYRE Capital is expecting a robust appreciation @ 9% p.a, we recommend that we expect not more than 3% appreciation as that appreciation is variable to market risks.
- Like in the case of a fully owned property, exiting (selling) takes 3-4 months, we should also consider a 3-4 months exit cycle for fractional ownership. We recommend investing with a time horizon of 5-7 years for this asset. Here are 3 chief exit options.
- Total asset sale – at an appropriate time (after a few years) the asset manager will sell the asset to a new investor (typically a fund house) after getting approval from 2/3rd investors.
- Annual sale – Asset managers offer an annual sale window wherein you can exit your investment at a discount to new investors.
- Private sale – You can sell your investments privately to a buyer you have found.
Credible Asset Manager + Our Recommendation
- MYRE Capital is a leading asset manager with over 100Cr of assets under management. It’s a venture by Morphogenesis a world-renowned architecture firm from India. They always invest in the opportunities they present and that gives us an additional level of trust.
- The Vaishnavi Tech Park pre-leased proposal checks all the right boxes in terms of the tenant, duration, lock-in and other parameters as shared above. We would recommend you to invest in this asset if you have a 5-7 year investment horizon. To nitpick, we would have liked the rentals to start immediately and the agreement to be registered.