At a time when thousands of residential homes find no takers, the race for a select few office buildings may seem curious. In many ways, it has all fallen into place this year for commercial real estate, from blockbuster transactions, a historic high in office space leasing, and most significantly, the launch of the country’s first real estate investment trust (REIT) in March. The fact that it has unfolded in the midst of an otherwise gloomy economic climate only makes it more intriguing.
This year, Tokyo-based Sumitomo Corp. offered over ₹2,238 crore for a three-acre plot in BKC, where it plans to build an office complex. Blackstone Group Lp., India’s largest investor-owner of office space, bought the ‘One BKC’ office building for ₹2,500 crore and is in talks to buy another multi-crore property in the vicinity. “If we got 2-3 bidders for a good asset earlier, now we get 10. There are also newer investors from Canada, Japan, Korea and Singapore who are looking at commercial office now," said Ramesh Nair, chief executive and country head at property advisory JLL India.
The reasons are fairly straightforward: the world of premium office space is relatively more scrupulous than the business model of an average developer in Noida. In the face of a housing slowdown, which saw a slew of homebuyer-led Supreme Court cases, there has been an exodus toward “safer bets" within the broader real-estate universe.
Though the office market is small, making up 12-15% of the overall property market, it is one of the fastest growing segments, compelling investors to chase investment-ready assets in the top cities. Foreign investors are now willing to take more risks and enter greenfield projects as ready assets are few and far between. But this unprecedented demand has ramped up asset valuations, raising questions whether the current boom is sustainable. Apart from the big cities, Tier II and smaller cities are yet to see a pick-up in demand and remain reasonably fragmented.
The calculation, thus far, is simple: driven by MNCs and tech companies in India, the demand for premium office spaces is bound to expand despite temporary hiccups like the ongoing economic slowdown. The prize everyone is after is rental income — a steady and reliable source of returns. “Global investments are happening but are still relatively less compared to other mature markets. To be able to reach a fraction of the size of Singapore’s REIT market, we will need to do at least more than 10 large REITs," said Shriram Khattar, MD, DLF’s rental business. It’s quite clear that commercial realty is a specialized business, but many developers have constructed without understanding the nuances of leasing and customer requirements, he said.
The big bets
This curious mix of global and local factors has resulted in pitched battles in glass-fronted buildings that dot business districts such as the BKC. Despite the forbidding price tag of ₹30,000-40,000 per sq.ft in the suburban Mumbai zone, everyone from institutional investors to pension and sovereign funds are willing to spend top dollar. The result: towers like the Citi Centre property, which found no takers during the course of at least two past sale attempts, are now coveted by over a dozen players.
The big boys of global real estate are all making an India play— whether private equity giant Blackstone from New York, Canada’s Brookfield Asset Management Inc., the Singapore government-backed GIC Pte Ltd, or the new entrant Mapletree Investment Pte Ltd. They are patient and long-term investors, who are placing their bets on rental assets—relatively protected even in India’s unpredictable real-estate regulatory environment.
JLL’s Nair estimates that global investments in Indian real estate (most of it in commercial office spaces) will touch $10 billion in the next two years, from about $5 billion in 2018. Commercial office space saw over 30 million sq ft leased between January-June, according to CBRE India, with many global and domestic firms positioning India as the next destination for either their global operations or for their tech-driven verticals.
“Around 90% of the demand for office space is from tech companies and they want quality infrastructure because they are looking at expansion," said Vinod Rohira, managing director, commercial real estate and REIT, K Raheja Corp.
The office market also reached another milestone as its overall size crossed 600 million sq ft in June-end, with Bengaluru, Mumbai and the National Capital Region being the top three markets. “Most institutional investors are counting India’s office sector in their long-term strategy as they look at a larger play, scalability and qualified developers. The question is how much will they allocate here from their global pool, and the risks they would take," said Ram Chandnani, MD, advisory and transaction services at CBRE South Asia.
The game changer
It all began with a chance meeting back in 2011, between Jitu Virwani, chairman of property firm Embassy Group, and Tuhin Parikh, senior managing director-real estate, Blackstone Group Lp. Virwani was on a flight from Bengaluru to Mumbai to meet HDFC Ltd chairman Deepak Parekh when a consultant from one of the Big Four advisories, who was on the same flight, suggested that he meet Blackstone’s Parikh over lunch before his scheduled meeting.
Virwani wanted to avoid any “deal talk" at lunch, but following the impromptu luncheon meet, the New York-based investor committed ₹130 crore in Embassy’s high-end residential project ‘Lake Terraces’ in Bengaluru. However, bigger things were yet to come.
In less than a year, Blackstone stepped in as a joint venture partner and invested ₹1,105 crore in three information technology (IT) parks, which Embassy was developing. There was no looking back after that. In March 2019, the Embassy Office Parks REIT, a venture of Blackstone and Embassy, launched India’s first real estate investment trust and raised around ₹4,750 crore. The REIT is the largest in Asia in terms of square footage, with a 33 million sq ft portfolio.
“I first thought of a REIT in 2007 with a Singapore investor," Virwani said. “Then the markets turned bad with the global financial crisis. But later, when we sold a stake to Blackstone in our IT parks and created a platform, we knew that we wanted to do a REIT together. It was Deepak Parekh who told me in 2006 ‘Never do an IPO, do a REIT instead’," he said.
The commercial real estate market is estimated to provide 294 million sq. ft of REIT-able space from the existing office stock, which could be valued at $35 billion, according to a JLL report. In mature markets such as the US, REITs, in some cases, have given better returns than the stock market. As India heads down the path of financializing its real estate assets, office spaces which are often leased for long periods, offering a high certainty of steady returns as a result, are likely to be the first to get onboard.
REIT coming into the Indian market is a game changer, feel analysts. For institutional investors, a REIT provides the possibility of an easy exit and boosts the image of India as a mature office market where there is transparency and good corporate governance, both of which are critical factors for any emerging economy.
REIT’s also allow high-net-worth individuals to directly invest in a listed trust, particularly at a time when many such investors have fled the residential market. When institutional investors own real estate, it becomes a professionally owned and managed process.
K Raheja Corp, which is preparing to file for a REIT with investor partner Blackstone this financial year, has a sizeable REIT-able portfolio. Bengaluru’s Prestige Group also plans to list their office assets across multiple cities after a year, said CEO Venkat K. Narayana.
The way forward
Why is there such a sharp contrast between the fortunes of office real estate and the residential business?
“Today, there are 40-45 office developers across cities, while there are 2000 housing developers in Mumbai metropolitan region alone," said Shobhit Agarwal, MD and CEO, ANAROCK Capital. “The office sector got institutional capital and corporate clients drove the demand as well as the quality of projects. In residential (sector), developers were on the driver’s seat and customers had no control." It is this possibility of a rule-based regime which has propelled India’s commercial office segment into the big league.
With most of the new players interested in staying in the Indian market over the long-run, the changing definition of what an office must look like is also resulting in a slew of innovations. Both investors and developers are now going beyond just buying or building assets to offering wider customer solutions as well as options to upgrade existing workspaces.
Singapore’s Xander Investment Management has invested $1 billion in the office sector and acquired around 15 million sq ft in key cities and now has its own co-working platform. “There’s a maturity in the office market which has made foreign investors look at India seriously," said Rohan Sikri, senior partner, Xander.
As Embassy’s Virwani, whose company pioneered the REIT model in India adds, “The game has changed. Today, corporate clients come and ask for larger spaces and global investors have given local developers the ability to scale and have taught cash flow management. Office space take-up in Bengaluru alone is equal to 12 cities in the world."
“End-customers like the Fortune 500 companies plan to expand and they won’t compromise on corporate governance, which will also push developers to catch up," said Vinamra Srivastava, CEO, Ascendas India operation and private funds.
On the whole, that most boring of spaces —the office—is where the hopes of India’s real estate sector, which employs a significant number of people, largely hinges at the moment. But the party has only just begun.
“Building good quality office space is far more complicated than residential, and operational efficiency is the key differentiator. Commercial office development is not a 100-metre race," said K Raheja Corp’s Rohira.