PremiumTwo done and one in the oven! I’m referring to the new real estate investment product that investors are cosying up to – Real Estate Investment Trusts (REITs). The Embassy Office Parks and the Mindspace Business Parks REITs launched in the last two years have done fairly well despite the pandemic. No doubt, post March, things haven’t been too rosy but they have held course and not gone below their issue price. Now we hear Brookfield is planning its own REIT.
We are seeing a very interesting play here – a combination of family-owned businesses (read Embassy and K Raheja Corp) and the big MNC landlords (Blackstone and Brookfield). These two set of commercial office space owners are driving the way the Indian office market will evolve in the coming decades.
Reset the clock to 2000. We had just past the Y2K situation and India was suddenly discovered by the world to be a tech-resource rich country. Never mind that the TCS, Infosys, Wipro, HCL and others were around before that. MNCs started lining up to set up their off-shoring, processing, R&D, software development centres in India. Their choices were largely limited to National Capital Region (NCR), Bengaluru, Chennai, and Mumbai to an extent. Pune and Hyderabad followed later. The setting was right for some enterprising family driven real estate firms to offer commercial offices to these corporate occupiers who were looking to set up their base in India. The previous mindset of most developers was to be on Build-Sell- Forget mode. However, some like DLF decided to take an alternate path; Build-Lease-Hold-Manage! Yes, it needed deep pockets and manageable debt, but it was a scalable model. Other followed suit – K Raheja Corp, RMZ, Embassy, Prestige, Unitech, Divyashree, Hiranandani, Salarpuria (now Salarpuria Sattva) and Shapoorji Pallonji. Amongst the foreign players, many came, but only one pursued it through – Ascendas (now Capitaland).
This period also saw quality of commercial office building improving dramatically and also the growth of these enterprises outside their home cities. Some of the developers in the north ventured south, west and east. The western developers went south, and the southern developers expanded into other south markets. The southern cities were undoubtedly the stars as more than 50% of the office demand in India are across the three cities - Bengaluru, Chennai and Hyderabad. This led to the development of large office portfolios – at least 20 million sqf plus!
Cut to the present decade - the era of 2010-2020. You see new names repeatedly crop up – Blackstone, Brookfield, GIC, ADIA, Allianz. Who are they?
These are large global and regional landlords who entered the field. These global landlords knew that India was complex and diverse, and decided to enter into local partnerships with the established family-driven enterprises. The ground was fertile for such partnerships as each of these family driven institutions had large leased quality assets. So, the global firms could hit the ground running. Some decided to buy out the families or take a controlling stake in the existing firms.
Some of the other factors that drove such partnerships or acquisitions were the need to scale up further, and hence the need for more capital. And the fact that for some local players, their debt book was too huge to manoeuvre.
Regulatory liberalization over the last decade also helped in opening up the Indian real estate market to permit FDI in real estate as well as the routes to set up REITs. This made the Invest-In-India (Triple I) story more compelling. So here we are. The Indian Grade A/ B real estate office stock across the seven major cities is around 600 million sq ft. Of this, about 50% is owned or controlled by around 10 institutions and landlords – some of which are still family owned, while others with the MNC landlords, and a few in REITs. This percentage is only going to increase in the coming years as these firms will do bulk of the future office development as they have access to capital, expertise and occupiers. We will see some consolidation within these 10 institutions as well.
These few large landlords will drive the Indian commercial real estate landscape, and the probability of having more office-based REITs will increase. But let us not forget that there are similar movements happening on the retail and logistics sides as well – a time-lag of five years (retail) and ten years (logistics) as compared to office. However, their REITs will have an accelerated entry to the market. All these will lead to win-win situations for all. The occupiers get better quality and managed buildings, investors get a choice of REITs across asset classes and promoters to choose from, and there is a much greater transparency in the market.
(The author is managing director, business solutions, Savills India. The views expressed are their own and do not reflect Mint's.)
