Almost five years after market regulator Securities and Exchange Board of India (SEBI) had first notified regulations for Real Estate Investment Trusts (REIT), the first such issue is about to hit the market this month.
Embassy Office Parks, which has leased out A grade office assets in key markets of Bengaluru, Mumbai, Pune and Noida, plans to raise Rs 4,750 crore through the first REIT issue, bids for which will open on March 18 and close on March 20. The price band for the issue is between Rs 299-300 per unit and bids can be made for a minimum of 800 units and in multiples of 400 units thereafter.
A REIT is a trust, which invests in income generating real estate assets. People buy units, and a REIT is traded like equity.
Embassy Office Parks is backed by Bengaluru-based real estate developer Embassy Property Developments and private equity firm Blackstone Group. The REIT portfolio comprises 33 million square feet of leased office space across seven infrastructure like office parks and four prime centre offices.
The assets include the iconic Express Towers in Mumbai, the First International Finance Centre in Mumbai’s Bandra Kurla Complex and the Manyata Embassy Business Park in Bengaluru. Of the total assets being put under REIT, 89 per cent of the portfolio is already completed and there are over 160 tenants, of which around 80 per cent are multinational firms.
Further, Embassy Property Developments is constructing additional 42 million square feet of commercial assets, over which Embassy Office Parks will have the first right. The company is also open to acquiring quality office assets from other developers too if an opportunity were to arise.
Embassy’s management remains bullish on the potential.
“Our four markets have absorbed more space than 11 international cities put together over the last five years. Bengaluru has absorbed more than Hong Kong, Beijing and Shanghai combined…Typical lease structure has a 10-15 per cent escalation every three years. Rents in our markets have grown 7 per cent on average, but also 10-12 per cent over a protracted period of time,” said Mike Holland, CEO of Embassy Office Parks.
He sees huge scope for growth in rentals across the markets its present in, considering that occupancy across its parks is 93-95 per cent and demand for prime commercial real estate remains high.
Many individual investors have burnt their fingers in the past, when they invested in under construction residential properties, only to see the developer going bankrupt and the property never delivered. In the last few years, property prices also fell in a few markets, which also drove away investors. Investing in a REIT could have its advantages for investors looking to diversify their investments into real estate.
“REIT is a transparent and regulated product by SEBI. You know what you are getting. It is predictable because you are getting those cash flows from those 160 tenants. It is also a liquid product as you could buy and sell the units like other instruments. You get a portfolio that is diversified,” points out Holland.
REITs are a $2 trillion asset globally and are a big draw in markets like Singapore, Hong Kong and the United States.
“When you look at the overall returns for REIT instrument, there is the yearly distribution, which is about 3.5 per cent and growing every year. That is one component. There are four to five growth levers in the company. The distribution component is attractive as well as the growth component, which will play out year after year. Both of these put together, give you returns, which are very equity like and the volatility that REITs globally see is far less than equity investors in bear phases,” said V. Jayasankar, executive director at Kotak Investment Bank.
Considering, that grade A office supply in India’s top seven cities is large, the potential for REITs is equally lot more than just the one issue that is now hitting the market. Other commercial real estate players will be closely watching the response to the Embassy REIT from retail investors.
“The grade A office stock in India is roughly 500 million square feet. So, there is an opportunity for other players to come up with REITs. A handful of other REITs can come around,” said Sachin Shah, chief investment officer of Embassy Office Parks.
Ahead of the issue, Embassy REIT has allocated around $125 million worth units various funds of US-based Capital Group in a pre-listing fund raising.
Morgan Stanley, Kotak Mahindra Capital, JP Morgan India and DSP Merrill Lynch are book running lead managers for the Embassy REIT.
