From sprawling business parks on the outskirts of Bangalore, to glass-walled office buildings towering over Mumbai’s financial district, India’s commercial property sector has enjoyed surging growth over the past decade.
This week brings a landmark moment for the industry, with the start of trading in India’s first real estate investment trust (Reit): a new asset class whose cheerleaders hope it will herald a wave of funding from foreign institutions and domestic savers.
The Embassy Office Parks Reit, backed by leading private equity group Blackstone and Bangalore developer Embassy Group, was 2.6 times oversubscribed at its $690m public offering, with buyers ranging from Capital Group, the big US asset manager, to retail investors spending as little as $3,500. Its share price jumped more than 5 per cent on its trading debut on Monday.
The maiden Reit had been awaited since 2016, when regulators first laid down a framework for the securities. Industry figures and analysts say more Reits are likely to follow, opening a vital funding source at a time when others are under pressure.
A debt market crunch late last year has made it tougher for many developers to raise funds from short-term bond issuance and from non-bank financial companies that have themselves been hit by the debt market problems.
“This is a big game changer,” said Joe Verghese, India managing director for Colliers International, a real estate services group. “It will be a very important source of liquidity for developers.”
The strong reception for the Embassy Reit — which owns seven business parks and four city-centre office buildings in Bangalore, Pune, Mumbai and Noida — highlights the recent divergence between the residential and commercial property segment in India. Widespread “pre-selling” of planned apartments has lowered the barriers for entry into India’s residential property market. Newcomers have helped drive a boom of high-end home construction, prompting alarm at growing vacancy rates and precarious balance sheets.
In contrast, commercial property has performed strongly in recent years, with occupied office space growing two or three times over the past decade in big hubs such as Bangalore, Mumbai and Greater Delhi. This has been driven largely by multinational companies, drawn by India’s huge number of English-speaking graduates. Foreign groups account for 80 per cent of the Embassy Reit’s leases.
“They’re here because of the talent available at scale,” said Mike Holland, chief executive of the Embassy Reit — while noting that cost savings are also a big draw for the global groups. Beyond the lower salaries commanded by Indian workers, companies can realise large savings on rent. The Embassy Reit’s prospectus cites annual office rents in big Indian cities of $14-$25 per sq ft — compared with $62 in New York and $148 in central London.
Given the funding crunch, the arrival of Reits is therefore well-timed for developers seeking to unlock capital to fund projects or to pay down debt, said Sachin Gupta, senior director at Crisil, a rating agency.
Crucially, Reits will also allow small Indian savers to invest in commercial property for the first time. Indian families have long concentrated their wealth in real estate, with physical assets accounting for about 56 per cent of household savings according to the central bank. But given the high cost and complexity of commercial property ownership, even better-off savers have overwhelmingly focused on houses and flats, which offer much lower rental yields than office properties.
Last month, regulators lowered the minimum investment for future Reits to Rs50,000 ($725) — a move that came too late for the Embassy Reit listing but will significantly widen the potential investor pool for those that follow.
The decision to open the asset class to smaller investors is logical, since it is no more risky than those already open to them, said Shubham Jain at rating agency ICRA. Indian Reit rules state that only commercial property can be included and at least 80 per cent of the assets must be revenue-generating.
While the listing of the Embassy Reit has been successful, the security’s subsequent market performance will be a crucial factor in determining how quickly the asset class takes off, warned Arvind Nandan, executive director of property consultancy Knight Frank India.
Several infrastructure investment trusts floated since 2016, under the same overarching framework that introduced Reits, all now trade below their listing price despite having hit their yield targets. This was due partly to rising central bank interest rates that reduced their spreads, according to Pratik Agarwal, chief executive of India Grid Trust, one of the infrastructure trusts.
The high governance standards expected by international investors, meanwhile, are likely to restrict the pool of potential Reit issuers to “four or five” in the near term, said Vinod Rohira, head of commercial property for K Raheja, a leading developer.
But the underlying drivers of Indian commercial real estate should keep sharpening the appetite of institutional and retail investors, argued Abhishek Lodha, managing director of the Lodha Group, one of India’s largest developers.
“With India’s 7 per cent economic growth, alongside increasing urbanisation and formalisation of the economy, you need an additional 12 to 15 per cent additional office space each year — for workers who also want to go out and be entertained,” he said. “It’s just a bet on the basic trends of India’s economy and demographics.”