- ‘Embassy REIT’ has issued up to 158 million units at a price of Rs 300 per unit aggregating up to Rs 4,750 crore.
- The Embassy REIT has already raised Rs 876 crore from strategic investors and Rs 1,743 crore from anchor investors.
- The total space take-up in the country reached an all-time high of about 47.4 million sq ft in 2018 recording a growth of 5.3 per cent YoY.
- As per CBRE India Office Occupier Survey 2019, more than 80 per cent of the corporates look forward to expanding their footprint in India (both in terms of headcount and portfolio) in the next two years; which augurs well for the future of office space demand in the country.
Marking a major milestone in the Indian real estate sector, ‘Embassy Office Parks’, a JV between the real estate company Embassy and private equity firm Blackstone has launched the country’s first Real Estate Investment Trust (REIT). Termed as ‘Embassy REIT’, the trust has issued up to 158 million units at a price of Rs 300 per unit aggregating up to Rs 4,750 crore. The key stakeholders of the ‘Embassy REIT’ includes Axis Bank (the trustee), Embassy Office Parks (the manager), Embassy (the sponsor) and Blackstone (the sponsor). The Embassy REIT has already raised Rs 876 crore from strategic investors which include SMALLCAP World Fund, New World Fund, amongst others and Rs 1,743 crore from anchor investors which include Capital group, Citigroup and Wells Fargo, among others.
The property portfolio of Embassy Office Parks in India comprises of seven best-in-class office parks and four prime city-center office buildings adding to a total leasable area of 32.7 million sq ft The portfolio is spread across the best performing markets in the country such as Bengaluru (17.2 million sq ft), Pune (8.9 million sq ft), Mumbai (2.1 million sq ft) and Noida (4.7 million sq ft). Additionally, the portfolio also comprises of two operational hotels, two under-construction hotels and one operational solar park.
Anshuman Magazine, Chairman and CEO, India, South-east Asia, Middle East and Africa, CBRE, said: “India offers major advantages for REITs including availability of a wide variety of quality assets, sustained government support in easing regulations, a wide investor base, and opportunities for capital appreciation, among others. Hence, it is likely that India's first REIT will be successful and will help elevate investor sentiments in the country’s real estate market.
Improved investor sentiments in office assets is likely to generate a potential fundraising avenue for developers and also propel major corporations to lease or purchase space in quality buildings. While the office sector is expected to dominate REIT listings initially, it is expected to be followed by retail and logistics sector in the long-run, thereby opening up avenues for the real estate sector at large.”
Rami Kaushal, Managing Director-Consulting and Valuation services, CBRE India, said, “A successful REIT listing would further prompt the entry of other asset-holding companies to issue their own offerings, thereby widening the REIT market size. The take-off of REITs in India is also expected to open a new investment avenue for retail investors by allowing them to invest in the commercial property market with a minimum amount of just Rs 2 lakh – which is much more feasible than investing in a physical asset.
How have REITs performed globally and where does India stand?
Globally, over 30 countries have already launched REITs and the US is the most mature market in terms of the REIT regime. The US is followed by other markets such as Australia, Belgium, Canada, France, Germany, Japan, Netherlands, New Zealand and the UK.
Many countries in the APAC region also have active REIT markets and while the APAC REIT market size is much smaller than the US, it also offers vast untapped opportunities. The market capitalization of APAC Real Estate Operating Companies (REOC) is higher than the US, indicating that there is enough room for APAC REOCs to spin off their investment properties into REITs.
REITs in APAC accounted for about 15-20 per cent of the total investment turnover in these countries over the past five years. In 2018, the total acquisitions undertaken by REITs in APAC reached US$ 22.5 billion, resulting in a share of about 18 per cent of the total investment turnover.
While REITs have proven to be a viable opportunity for alternative investments, with successful track records in APAC countries, Japan and Singapore in particular, have achieved the largest REIT market capitalisation in the region.
Though the transaction volume in India is yet to gain traction comparable to the other global economies, the first REIT listing in India is likely to catalyze investments in the country and also stimulate prospective growth of APAC REITS in the years to come.
The brighter side of India’s commercial real estate market
Over the past few years, the office market in India has been going through a healthy makeover both in terms of occupier demand and development completions. The total space take-up in the country reached an all-time high of about 47.4 million sq ft in 2018 recording a growth of 5.3 per cent YoY. Bengaluru, followed by NCR, Hyderabad and Mumbai dominated office leasing on an annual basis, accounting for almost 80 per cent of the overall space take-up. Tech corporates, engineering and manufacturing and BFSI companies have been the key propellers of leasing demand. Corporates also remain bullish on their future expansion plans in India. As per CBRE India Office Occupier Survey 2019, more than 80 per cent of the corporates look forward to expanding their footprint in India (both in terms of headcount and portfolio) in the next two years; which augurs well for the future of office space demand in the country. This increase in demand has also fuelled development activities in key cities. The total office stock in the country has crossed 580 million sq ft as on Q4 2018. Further, more than 100 million sq ft of space is lined-up for completion over 2019-2021.
The robust growth in commercial real estate has had an encouraging impact on rental growth and yields, thereby positively impacting the viability of a REIT in the Indian scenario. Southern cities, including Bengaluru, Hyderabad and Chennai witnessed rental increment across key micro-markets in the range of 5-10 per cent YoY in 2018. NCR, Mumbai and Pune also witnessed a rise of about 2-5 per cent YoY, albeit in key locations.
10 factors to make REIT a success story in India
In 2016, CBRE had identified ten critical success factors for REITs in the country, covering three key aspects – regulation, market performance and investors. We take a relook at those factors and their current status:
Status of the 10 Critical Success Factors in 2019
- Provision of tax pass through
- MAT exempted on gains from transfer of shares by SPV to REIT
- DDT exempted on rental income distributed by SPVs to REIT
- Presence of a clear regime
SEBI regulates / monitors all REIT stakeholder activities
- Policy that enables growth
Stakeholder concerns addressed by the government; guidelines revised in 2016 and subsequent changes made in 2017 and 2018
- Transaction tax
Clarity given on applicable transaction taxes
- Right market cycle
This is the right time to enter the Indian commercial market as rental growth is expected to continue in most prime markets.
- Risk Adjusted Returns
The REIT is expected to offer higher yields (compared with 10-year government bonds), thereby appealing to investors.
Issuer / Investor Factors:
- Core stabilised assets
Players with serious intentions of launching REITs have been acquiring prime properties over the past few years.
- Increase investible assets supply
The allowance of 20 per cent investment in under-construction projects and other instruments, widened definition of real estate, establishing a ‘Holdco’ and allowance of REIT to invest through a Holdco are steps in the right direction.
- Broad investor base
Foreign investors (including Registered Foreign Portfolio Investors or RFPIs), portfolio investors and NRIs can now invest in REITs.
- Investor Preference
REITs are now likely to be viewed as a viable investment option vis-à-vis development projects.