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Blackstone  (Bloomberg)
Blackstone (Bloomberg)

Global funds place larger bets in India’s office assets

  • Last week, Bengaluru developer Prestige Group signed an agreement with Blackstone to sell rental income assets for around $1.6 billion
  • Analysts attribute the increased enthusiasm of foreign investors to buy office assets mainly to the success of the two real estate investment trusts so far

Bengaluru: Global investors such as Blackstone Group Lp and Brookfield Asset Management are placing larger bets on India’s commercial office sector, even as rental and leasing outlook will stay subdued for the next two years.

The seven-year bull run of the office sector hit a pause this year owing to the pandemic but that hasn’t deterred investors to buy rent generating assets.

On Monday, Bengaluru-based RMZ Corp said it has sold 12.5 million of its real estate assets to Canada’s Brookfield for $2 billion, including the divestment of its shared working business CoWrks.

Last week, another Bengaluru developer Prestige Group signed an agreement with Blackstone to sell rental income assets for around $1.6 billion.

RMZ and Prestige Group, largely family run companies, would use bulk of the sale proceeds to deleverage and the remaining equity to build and operate projects.

Post deleveraging, Prestige and RMZ will each have nearly 3500-4000 crore of equity to for future growth, said a person familiar with the matter.

Analysts attribute the increased enthusiasm of foreign investors to buy office assets mainly to the success of the two real estate investment trusts (REIT) in the country so far. Embassy REIT’s listing in 2019 and the Mindspace Business Parks listing amidst the pandemic, both backed by Blackstone as a majority and minority shareholder respectively, have given investors huge confidence in the office sector.

“Investors are betting on income yielding assets with no development risk, where yields are better than global countries, occupiers are multi-national firms. But more importantly, the success of the REITs has been a deciding factor because it now gives them an easy and established exit route," said Anshuman Magazine, chairman & CEO - India, South East Asia, Middle East & Africa, CBRE.

Blackstone is the largest office owner in India with a portfolio of 118 million sq. ft across 44 assets in six cities. It has so far invested over $15 billion across sectors such as real estate ($7.8 billion), private equity ($6.9 billion) and tactical opportunities ($400 million).

Brookfield, on the other hand is a newer entrant and closed its first large deal in 2014, when it bought Unitech Corporate Parks. It recently filed a draft offer document with market regulator SEBI to raise around 4400 crore through a REIT. The IPO could be launched this year-end or by early 2021 latest.

“Brookfield has nearly 40 million sq ft of operating assets, with strong presence in north and east, and with the RMZ deal, in south India. Unlike Blackstone, it has no joint venture partners and has 100% ownership of all its assets. Once it lists the REIT, it will only grow it further going forward," said a person familiar with the development, requesting anonymity.

As part of RMZ’s portfolio buyout, Brookfield will now also manage the former’s co-working business in the country. It had earlier invested in US-based co-working firm Convene.

After buying these assets, Brookfield and Blackstone are likely to improve and polish them, and then may do a REIT in 2-3 years, but they have long-term money and aren’t in any hurry, said Shobhit Agarwal, MD and CEO, Anarock Capital.

Blackstone and Brookfield spokesperson didn’t respond to queries.

Property advisory JLL’s CEO and country head Ramesh Nair said developers like RMZ and Prestige has raised a lot of debt to grow their portfolio and this will help them balance their leverage levels.

“The overall commercial sector has gone through a full cycle. To get real returns, they need to sell and the returns can be put to growth. Globally, real estate funds are sitting on $300 billion of dry powder, Blackstone and Brookfield being the two largest. Both rentals and leasing will be subdued for some time but investors are taking a long-term view," Nair said.

In 2019, office space absorption or leasing hit 46 million sq ft, and is expected to close at around 25 million sq ft this year. Even if leasing rises to 30-35 million sq ft next year, companies will remain cautious about taking up more office space post pandemic.

“The investment strategy has changed post Embassy’s REIT in 2019. Most office investors bought asset by asset but now, the cheque sizes are growing bigger. The two REITs were not only successful were also the best of funds and investors placed bets, and they paid off," Agarwal said.

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