Bengaluru: India’s commercial office sector and the recent success of the initial public offering (IPO) of Embassy Office Parks REIT (real estate investment trusts), India’s first REIT to be listed, indicate a return of confidence among both institutions and retail investors in the sector. This comes against the backdrop of gloom in residential real estate and the liquidity crisis in non-banking financial companies (NBFCs).
About 200 million sq. ft of real estate space will be added in 2019 across categories including office, retail, residential and logistics, according to property advisory CBRE South Asia Pvt. Ltd’s Real Estate Market Outlook 2019—India report published on Wednesday.
If 2018 witnessed office space absorption crossing an all-time high of 47 million sq. ft across nine leading cities, nearly 40 million sq. ft of new office space supply will come in over the next year.
In an interview, Anshuman Magazine, chairman and chief executive officer (India, South-East Asia, Middle East and Africa), CBRE, spoke of more REITs in the pipeline and a surge in institutional investments. Edited excerpts:
How will the success of the Embassy Office Parks REIT impact the real estate sector?
We spoke about REITs in 2002 when there was no major office portfolio, no large institutional investors in the sector.
Even if we are late by 7-8 years in launching a REIT in India, I could not have imagined earlier that international firms such as Blackstone Group, Brookfield, or GIC Pvt. Ltd would become some of the largest office space owners here. REIT coming in changes many things. When institutional investors own real estate, it becomes a professionally owned and managed process.
It will encourage more institutional investments, foreign and domestic, in real estate because REIT provides an exit and brings in governance and transparency.
Today, most developers want to hold on to their office portfolios instead of selling. Even smaller developers who have 2 million sq. ft or 500,000 sq. ft of office space are saying they want to do a REIT one day. It has become the flavour of the season.
The number of high net worth individuals are increasing and instead of buying real estate directly, they can buy into a REIT. It would be interesting to see how the Blackstone-Embassy REIT stock price moves. If it does well, several other firms will want to do a REIT.
Lodha Developers deferred its IPO last year because of unfavourable stock market conditions. Real estate hasn’t seen an IPO in a long time. Will the success of the REIT IPO change that?
On the one hand, both are connected because people will see that a new real estate product has fared well in the stock market. That automatically gives investors confidence.
On the other hand, we need to remember that the first REIT IPO has a global investor like Blackstone’s name associated with it and it is essentially an income producing asset like commercial office, which gives steady and higher returns. However, it does improve the market sentiment for real estate stocks.
With the NBFC crisis playing out, has the real estate funding ecosystem changed?
Many of the good developers have global institutional investor partners or private equity partners. That gives them the financial wherewithal to go out and do development because they have slightly longer term financing available.
The NBFC crisis has had an impact and seen a slowdown in funding real estate development. But it’s coming back slowly.
For big developers who have good projects and delivered to customers in the past, funding is not a problem. The good thing that has happened is that expectations over returns from real estate have become more realistic.
Prices went up way beyond a realistic point, that we forgot we are a developing country. But prices have corrected and developers are coming up with new affordable products. Retail investors are also realizing that real estate is a good investment opportunity but one shouldn’t expect crazy returns.
How do you think 2019 will fare for the sector?
The last four years have been fantastic for the commercial office market and this year too, it will continue to perform. 47 million sq. ft was leased in 2018 in India, which even globally is a massive number. The size of our office market is relatively small, but it would be one of the fastest growing markets. When I started my career, the country’s total office space supply was 35 million sq ft. Now, we are adding a similar amount of space every year.