Embassy Office Parks REIT Set For A November Launch
World’s largest alternative asset manager Blackstone Group and its Indian partner real estate major Embassy Group on September 24 approached the Securities and Exchange Board of India (Sebi) to file documents to launch their real estate investment trust (REIT), the first in India and the second-biggest in Asia in terms of office space portfolio. According to media report, Rs 5,300-crore Embassy Office Parks REIT might be launched by Diwali after getting all due clearances. The two partners registered the REIT in July last year.
REITs are entities that will own and operate commercial real estate by pooling in money from various stakeholders. Quite similar to mutual funds, REITs are traded on stock exchanges. And, unlike stock investments, long-term investments are expected to earn much higher.
It was in 2014 when the government announced the rules for launch of REITs in the country. A cold response by market players led to the Centre announcing several perks in this period to encourage investors. The Embassy Office Park REIT is expected to unlock an important source of capital for Indian real estate developers from a global REIT industry, which according to an Ernst & Young report, stood at $1.7 trillion in 2016.
“A good debut for the Blackstone-Embassy issue could quicken potential offerings by the likes of Xander group, Brookfield, CPPIB and IIFL Holdings which are holding high-quality realty assets ... Even if only one-fourth of the high-grade, yield-generating commercial properties are moved into trusts, we will have a $50 billion REITs market in India in a few years,” Nisus Finance Services Managing Director Amit Goenka was quoted by Bloomberg as saying.
Under the REIT is listed 33 million square foot (sqf) of marquee office space with tenants such as Microsoft, Rolls Royce, IBM and Google. It includes properties from the joint venture as well as from Blackstone’s own portfolio. The partners aim to add another 50 million sqf in their portfolio in future.
What happens now?
India’s first infrastructure investment trust (InvIT), IRB InvIT Funds, received a lukewarm response after being listed. Clearly, investors are looking more than is typically offered by such investment entities. That could pose a challenge for the upcoming IPO. While Embassy Office Parks currently generates Rs 2,200 crore as rent annually, it aims to reach a market value of Rs 35,000 crore on its debut. This would amount to investors earning slightly over seven per cent on yield. Typically, long-term investors gain between seven and nine per cent returns on their investments.
However, to become popular in India, REITs will have to do better than that. Reports say REITs in Japan, Australia and Singapore are currently yielding 370-450 basis points (bps) above their 10-year government bonds. Since benchmark Indian government bonds now fetch close to seven per cent, a REIT should fetch at least 300-400 bps above the government security yield to gain popularity.