JLL India article on - Additional office space of around 100 mn sq ft expected to be listed in REITs

The evolution of REIT-linked investment options in India reflects the maturity of the office market

Ramesh Nair, CEO & Country Head – India, JLL

·        The success of the first REIT by the Blackstone-Embassy JV has bolstered the confidence of other developers and investors to come up with similar listings

·        Developers with a commercial asset portfolio can use this option to reduce their debt

·         The growth of REIT listings in India will ensure more transparency

The success of the first REIT in India, Embassy Office Parks, has created the possibility that around 100 mn sq ft office space could be listed under REIT in the short to medium term out of the total REIT-worthy assets of 302 mn sq ft. The total REIT-worthy assets, which includes Embassy Office Park REIT, would translate to a potential investment of USD 38.6 billion.

As per JLL Research, India’s top six cities, Delhi-NCR, Mumbai, Pune, Bengaluru, Chennai and Hyderabad, account for a majority of the share of Grade-A office space assets. Marquee clients occupy these offices. And India’s leading commercial office space developers are exploring REIT listings.

The strong demand for office space in 2019 adds to the market of REIT-worthy assets.

The success story of India’s first REIT

Embassy Office Parks launched in April 2019 and heralded a new investment journey and has redefined the growth of the sector. Its performance has put to rest all apprehensions and it is likely to lead to the more REIT listing in the country. It has bolstered the confidence of other developers and investors (primarily with commercial office asset portfolio) to list their assets under REIT platform.

The Embassy Office Parks REIT has seven office parks and four office buildings in Bengaluru, Pune and Noida with two completed and two under-construction hotels totaling 1,096 keys. The total portfolio is of 32.6 mn sq ft comprising 24.2 mn sq ft completed and 2.9 mn sq ft under-construction office space and proposed development area of 5.5 mn sq ft.

The REIT has registered robust numbers since inception. Revenue from operations for 2Q FY2020 grew y-o-y by 15 percent to Rs 5,206 mn and cumulatively grew y-o-y by 17 percent for 1H FY2020. Net operating income for 2Q FY2020 grew y-o-y by 16 percent to Rs 4,384 mn and cumulatively grew y-o-y by 18 percent for 1H FY2020. Net operating income margin for 2Q FY2020 and 1H FY2020 stood at 84 percent.

For the reasons above, Embassy Office Parks’ REIT is currently trading at a premium of 37 per cent to its allotted price as on November 25, 2019. This performance, during adverse market conditions, is likely to attract more retail and global investors.

Embassy Office parks REIT: 37% returns since listing on April 1, 2019

Source: NSE

What we may witness in future?

For instance, Bengaluru-based Prestige Group has 11 million sq ft of rent yielding assets and nearly 15 million sq ft of under-construction office assets. As per market reports, there are strong indications of Blackstone Group and K Raheja Corp listing their jointly-owned 20 million sq ft commercial portfolio through REIT. Together, these players would account for almost 50 percent of the potentially upcoming REIT universe. As per publically available news reports, other players who are also considering REIT listings include Bengaluru-based RMZ Corp, Mumbai-based Godrej Properties and Pune-based Panchshil Realty.  

Key trends that will guide the growth of REIT in India

The success of Embassy REIT brings to the forefront some of the key trends that will influence the growth of REITs in India.

With the success of the first REIT, subsequent listings are expected to make a gradual start in India in line with global trends. Several positive factors such as progressive policies, smaller lot size, tax efficiency, strong investor interest and presence of global investors will work in favour of REIT listings in India.

A strong demand-supply condition in the office market would also drive the return of REITs. However, any impediment to the supply pipeline will impact the REIT listings too.

Some challenges

Limited knowledge and awareness of the new product are one of the biggest hurdles in front of fund managers. Moreover, investors have not even seen a full year of the run for the first REIT. Compared to this, they already have multiple alternate investment options across other asset class to look at within the ambit of the capital markets.

Since REITs are listed on the NSE and BSE, trends in the equity markets will influence the return expectations of retail investors looking at REITs market. As a result, like any other market-linked investment option, retail investors have to be told about the risks.

The outlook

India’s commercial office space is expected to dominate the REITs market due to its robust growth, resulting in rising rental yields and steady rise in capital values. Despite certain challenges in terms of investor awareness about the product currently, interest is expected to increase over the years.

The growth of REIT listings in India will ensure more transparency and maturity due to the mandatory regulation over property valuation, regular updates, research coverage and disclosures relating to assets managed by REIT.

Developers with a commercial asset portfolio can use this option to reduce their debt from proceeds received by listing their assets through REIT. Though the growth in the REIT market in India has been gradual, we can expect it to pick up significantly going forward.