Laying A Solid Foundation For REITs In India
At the start of FY2020, India witnessed the launch of its first Real Estate Investment Trust (REIT). Embassy REIT was listed on the Mumbai Stock Exchanges, thereby delivering to domestic and international investors the opportunity to participate in the growth of commercial real estate in India. With a 33 million square feet (msf) portfolio, Embassy REIT is Asia’s largest office REIT in terms of area. The market capitalization stood at INR 310 bn (circa US$4.5 bn) as on September 30, 2019.
The IPO was launched at a time when both global and Indian domestic economies were going through a time of turbulence with heightened trade tensions between US and China, flight of capital from emerging markets, turmoil in India’s shadow banking sector, political strains and dampened investor sentiments. Despite this challenging backdrop, the Rs. 4,750Cr ($680m) IPO was oversubscribed 2.6 times with strong participation from domestic and global institutional investors.
Post listing, Embassy REIT’s performance has emphasized the strength of the REIT product. Having distributed s 880Cr over the first two quarters since listing, the REIT structure highlights the appeal of a regular distribution. In addition, the portfolio revaluation, which SEBI required to REIT to conduct semi-annually, on a basis has shown a 4% increase in the Gross Asset Value (GAV) of the underlying asset base.
At the end of H12020, the REIT has delivered c.38% total returns to unitholders since listing, with a combination of the Quarterly Distribution and the increase in the unit price in the market. For the Q22020 period, Embassy REIT has outperformed the indices for US & Singapore REITs, the Bombay Sensex and the NIFTY.
The Indian Commercial Real Estate sector has strong underlying business fundamentals says Mike Holland, CEO of the REIT. “International companies based in India continue to hire highly educated, highly skilled, technologically oriented employees at a reasonable cost and this continues to drive the demand for Indian office. Today, Embassy REIT derives 80% of our revenues from a diverse group of global companies comprising many prominent Fortune 500 corporations and we continue to strengthen its portfolio by actively diversifying tenant base”.
“There is strong demand for Grade A office spaces across the top six cities in India. We cater primarily to global companies undertaking sophisticated services – in technology, e-commerce, R&D, fintech, analytics, artificial intelligence, aerospace, digital transformation, and so on either for their own global businesses or for their global customers. The demand for STEM talent to serve these corporations is robust and manifests itself in strong demand for commercial office buildings.”
Major Indian cities continue to record the highest office absorption among global business hubs. Office absorption since 2012 has been steadily increasing and given Embassy REIT’s presence in major gateway cities in India – Bengaluru, Mumbai, Noida and Pune; there has been consistent absorption of office spaces across the portfolio.
Rentals in Indian commercial markets are significantly lower than those in global hubs; capital values are also lower. As a result, Indian is an attractive commercial real estate market as it enjoys significant potential for appreciation in both rentals and consequent underlying asset value.
Embassy REIT COO, Vikaash Khdloya, points out “On the supply side, the market continues to consolidate towards fewer, larger and institutional-quality landlords and the recent NBFC crisis and consequent liquidity squeeze has only reinforced this trend, to the benefit of our business. The potential supply slippages arising from liquidity challenges, coupled with our low vacancy and solid demand, continue to further propel rental growth.
Corporate occupiers are looking for comprehensive setups they require to efficiently execute their business plans. Therefore, office parks need to offer more than just offering amenities to enhance their product offering. Embassy REIT focuses on providing a ‘total business ecosystem’ philosophy – whether by way of investing in ancillary amenities such as hotels and conferencing facilities, or by undertaking select infrastructure and upgrade projects. This leads to the REIT sustaining a competitive advantage and allows us to deliver long term value to our stakeholders.”
SEBI’s REIT regulations mandate REITs to distribute cash to unitholders semi-annually. Embassy REIT has gone a step beyond that to distribute on a quarterly basis. Total payout for half year stood at Rs880Cr mn (c. $ 126 mn), at a payout ratio of 99.5%. This has added to the appeal of the underlying business of Embassy REIT – high quality office properties, leased to largely international corporations under long term contracts, with pre-defined rental escalations, consistent mark-to-market on new leases and our low risk, on-campus development, all coming together to generate predictable, sustainable and growing cashflows.
Embassy REIT has set the standard for the REIT asset class in India with its performance, distribution, governance and high-quality portfolio that caters to the office space demands of global corporations. 2019 has set a solid foundation for REITs as an investment structure in India. We look ahead to 2020 when we may see further REIT entrants into this now proven framework in India.