Bengaluru: A few months back, American asset manager Blackstone Inc., India’s largest office landlord with about 111 million sq ft of office space under its belt, wanted to sell half the stake it holds in two office portfolios developed by Pune-based builder Panchshil Realty and Bengaluru-based Sattva Group. Blackstone’s talks on the stake sale with GIC Pvt Ltd, Singapore’s sovereign wealth fund, fell through.
In a similar story, again this year, Blackstone wanted to sell part of its stake in Embassy Office Parks REIT. The deal talks with private equity investor Bain Capital didn’t go anywhere.
REIT is short for real estate investment trust. It functions like a mutual fund—a sponsor raises capital and invests it in real estate projects like office parks or shopping malls. REITS allow smaller retail investors to own a portion of income-generating real estate properties that would otherwise be unaffordable.
India has three office REITS—the Mindspace Business Parks REIT, the Embassy REIT and the Brookfield REIT. Blackstone was a sponsor to Mindspace and Embassy.
In January 2022, Blackstone sold its entire 9.2% stake in Mindspace Business Parks REIT to Abu Dhabi Investment Authority (ADIA) for $235 million, at a 16% premium over the REITS’s August 2020 initial public offering (IPO) price. It also made a partial exit from the Embassy REIT in September 2022. It sold around 8% stake through open market block deals for $326 million.
But the markets have changed since then.
India’s largest office landlord has struggled to find buyers for a good valuation in 2023. In fact, there have been no big bang exits for a year now, with market watchers citing Blackstone’s return expectation from capital invested to be way higher than what buyers are willing to pay—at the moment.
Private capital markets have shrunk and exits through private transactions have become a challenge. Most of the large players—apart from Blackstone, there is Brookfield Asset Management, GIC, ADIA, CapitaLand Group and Ivanhoe Cambridge—have enough on the table and there are hardly any new investors in the Indian market.
For asset managers like Blackstone and Brookfield, exits from rent generating assets are critical. Blackstone has a fund structure and the company needs to return money to its investors, churn the capital. Rent generating office properties typically generate 7-8% yield, and there is no point holding on to them for long because a sale could fetch a higher return.
While big ticket exits have dried up, office space acquisitions are on the slow lane, too. Blackstone’s last big office acquisition was in 2020 when it acquired Bengaluru-based developer Prestige Group’s office parks and shopping malls for $1.6 billion, one of the largest real estate portfolio buys back then.
And again, market forces are at play. Office real estate developers aren’t willing to sell—at the moment.
There are multiple concerns. Global corporations are taking longer to decide on expansion and the US tech sector has slowed down. As a result, real estate markets that rely on the tech sector, such as Pune, Hyderabad and pockets of Bengaluru, have an oversupply of inventory. In addition, the hybrid work model, post the pandemic, has taken the sheen off the demand for offices. Blackstone, whose real estate investments in India have an enterprise value of $20 billion, is not immune to such headwinds. The company is slowing down in the office market but expanding elsewhere (more of this later).
“We are treading cautiously. But, it doesn’t mean we will not do any office transactions or investments in the next 24 months,” Asheesh Mohta, head of real estate acquisitions, India, at Blackstone, said. “From an asset class perspective, the office market continues to hold massive potential. But in the next 12-24 months, we will be more selective about what we do,” he added.
“Blackstone is going slow but the fact is that large office deals are also not happening. Sellers know this is not the best time to sell because they won’t get the value. Office developers, backed by institutional investors, are well capitalized and are willing to wait till the market improves,” said Shobhit Agarwal, managing director and chief executive officer (CEO) of Anarock Capital, an investment banking advisory.
So, what exactly is the asset management company’s strategy, going ahead?
The New York-based investor has been in India for over 15 years now; it opened a real estate division in 2007 and signed its first transaction in 2008, buying a minority stake in Synergy Property Development Services Pvt. Ltd, an asset management firm. Blackstone started buying office assets only in 2011. At that time, not many investors were interested in the prime rental asset class. For Blackstone, the office sector was a contrarian bet when everyone eyed residential.
The bet worked over the next several years. Blackstone built and scaled its portfolio through developer partnerships for under-construction projects and acquisitions of ready office assets. Capital was never a problem and still isn’t.
With allocations from Blackstone’s $30 billion global fund and an $8.1 billion Blackstone Asian Opportunistic Fund, the company has enough dry powder. But with the market slowing down, where will it invest its cash now?
“We have been selective about where we invest, who we invest with, and in which micro-markets. Mumbai and parts of Delhi-NCR look good with not much supply. We would love to do more (investments) in Mumbai,” Mohta said.
Blackstone is currently exploring two possible acquisition opportunities of ready office assets, in Mumbai and Gurugram. The Gurugram deal may close in the next few months.
Given the oversupply concern in the tech-dependent markets, its investments in under-construction projects in these markets will be through existing partnerships.
“Blackstone is unlikely to do a new partnership with a developer now. The objective is not so much to grow the portfolio but to maintain it, and and make exits,” said Piyush Gupta, managing director, capital markets and investment services, Colliers India, a property advisory firm.
Meanwhile, office leasing is yet to reach the 65 million sq ft mark of 2019, as per data from CBRE. While the market has recovered from the lows of the pandemic years, this year’s gross leasing is expected to be lower than in 2022 (56.5 million sq ft). Analysts believe that a pick-up in leasing is critical for new investments to kick in.
Earlier this year, Blackstone was planning yet another REIT. This time, a mega one that would have combined the office assets of Nucleus Office Parks— an office platform fully owned by Blackstone—and those of Panchshil in Pune and Sattva in Hyderabad. Overall, this totalled over 40 million sq ft of office space.
The REIT plan was paused for a while but then revived. It is likely to be listed in 2024.
REITS are under pressure, in terms of both pricing and valuation. Currently, they are trading at a 15-20% discount to their net asset value (assets minus liabilities), as per an ICICI Securities report. They are expected to underperform in the near term due to factors including the delayed implementation of the Development of Enterprise and Service Hubs (Desh) Bill, which seeks to replace the existing law for special economic zones (SEZs). The current incentive structure on SEZs may change once the new law is implemented. Some of the SEZs may get denotified for various reasons, including under-utilization.
The delay in denotifying SEZs and the uncertainty around it may impact exits for investors, analysts said. A bulk of the office space holdings by REITS is in SEZ space. Investors are not keen to buy into SEZ space until there is clarity.
“The delay (in notification) has led to vacancies in office spaces in SEZs and occupiers are also waiting to take a decision on taking up space or moving out depending on the outcome,” Ram Chandnani, managing director, advisory and transaction business, CBRE India, a property advisory firm, said.
In addition to the confusion around SEZs, other reasons mentioned earlier in the copy are also impacting REITS, such as slow tech hiring and hybrid working. A recovery is expected in the next 12-24 months.
“We are fiduciaries of our investors’ capital, and our goal is to produce strong returns for them. The pricing of some of these REITS will improve over time. We will look at exits when the time is right. We are not in a rush and are keeping our options open,” Mohta said.
“We have done three of the four REITS that are listed. That’s a market we know very well. Investors understand we are credible sponsors and that we will bring good quality assets. There is also private investor interest in some of these assets,” Mohta added. “Today, I do think some of these REITS are undervalued. It’s just a reflection of the global macro environment. It’s temporary”.
Apart from the two office REITS, Blackstone is a sponsor of a retail REIT, the Nexus Select Trust REIT. It made its stock market debut in May 2023. This REIT mostly has urban consumption centres (malls), hotel assets, and a few office assets.
While asset managers like Blackstone are impacted because of the slowing office market, not every player is. Think of GIC, Singapore’s sovereign wealth fund.
Recently, it partnered with Brookfield India REIT to acquire two large commercial assets, in Mumbai and Gurugram, from Brookfield Asset Management’s real estate private equity division for an enterprise value of $1.4 billion.
GIC, which has almost travelled the same vintage as Blackstone in India, has been the most aggressive in the current market and has been scouting for ready and rent generating office assets. Being a sovereign fund, it has no pressure to return money. It has a free runway with little competition.
If Brookfield or Blackstone need to exit an investment, GIC would be an obvious option, analysts pointed out.
In the meantime, Blackstone is fast diversifying beyond office assets. India’s real estate market has other hot propositions. Logistics parks are one of them with a growing thrust on domestic manufacturing and geopolitical shifts from China to India.
In 2022, Blackstone set up a logistics vertical called Horizon Industrial Parks to house its existing logistics assets. It would be scaled up through acquisitions and greenfield developments. In a short span, Horizon, with a portfolio of 25 million sq ft and 17 parks across eight cities, is among the top logistics developers, apart from Indospace and ESR Logistics.
While office investments have been measured, Blackstone said last year that it would invest ₹4,500 crore and double its logistics portfolio over the next 24 months on the back of increasing demand for organized warehousing space.
“Logistics demand continues to be very strong. Our logistics portfolio is 95% occupied, and in the locations we are in—if you build, there are tenants waiting to take up space,” Mohta said.
Property consultants said that the logistics market could witness consolidation.If there is an acquisition opportunity, Horizon could aggressively compete.
Apart from logistics, Blackstone is also betting on data centres, yet another hot market considering the explosion of data and the Indian government’s stress on data localization. The government believes that the data of Indian citizens, particularly financial data, must reside within Indian borders.
In 2022, Blackstone created a data centre platform, Lumina Coundinfra, and said that it would invest around $300 million in its first data centre campus in Navi Mumbai.
Blackstone’s remaining bets are on shopping malls and hospitality. Both the sectors have seen strong recovery post the pandemic. The asset manager, which had acquired a bunch of malls as part of the acquisition deal with Prestige Group, currently has 17 malls under the Nexus Malls brand, spanning 10 million sq ft in retail portfolio.
“Retail is almost like a bad word in some parts of the world. India is an exception. But in terms of acquisitions, there are fewer assets as it’s an operating business,” Mohta said.
Can these bets offset the current and future slumps in the office sector? It will take time. Of Blackstone’s enterprise value in real estate assets of $20 billion in India, over 80% is due to the office portfolio.
(Ranjani Raghavan contributed to the story)
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