India’s grade A office assets stock is pegged at ~ 700 million square feet. Institutional investors are now inching closer to owning ~40% of this stock. I believe this evolution in ownership pattern can be attributed to India’s inherent advantages and resilience that our office market demonstrates; Owing to India’s demographic dividend, the confidence in India as an off -shore destination for global firms remains strong; sustained interest from large global firms like Wells Fargo, Goldman Sachs etc. who stayed on track with their growth plans in India despite the pandemic is an affirmation of this.
“India has been Blackstone’s best market for investment in the world”, Stephen Schwarzman, CEO, Blackstone Group. This statement is a harbinger of India’s office assets potential for growth, they are an active player in the Indian market, continuously looking at new opportunities and managing the existing portfolio to optimise returns.
Recently their $1.5 Billion acquisition of Prestige Group’s commercial portfolio was the most talked about transactions in the recent past. Blackstone has deployed over $11 billion in the country’s commercial real estate so far; There are more funds following the trend. Recently Blackstone pared their stake in real estate investment trust (REIT) Embassy Office Parks REIT, reducing Blackstone’s holding in the REIT to 32 per cent from earlier 38 per cent. BNP Paribas Arbitrage, American Funds Global Balanced Fund, Stichting Depositary APG Tactical Real Estate Pool and Integrated Core Strategies (Asia) are among the key entities that have bought these REIT units in block trades. Signalling interest from newer names in Indian office real estate.
Single ownership, compliant, clear titled asset portfolios by developers, high tenancy levels, world class assets and favourable exit routes in the form of REITs provided the impetus to the institutional funds to invests in India’s office real estate.
The cost arbitrage to operate in quality office asset in Indian market was a critical factor which initially succeeded in positioning India as a lucrative cost effective, destination. The rentals for offices in most markets are still very competitive. For investors, this translates into attractive yield compared to more mature markets. The current REITs listed in India provide yields of 6.5% – 7.5% compared to a lower ( 3 – 5%) in other global markets.
Now, what does this shift in ownership pattern from India based developers to global institutional landlords mean for Indian real estate?
The institutional investors provide much needed liquidity and respite for commercial developers. Listed Real estate investment trusts are now being used by developers to strengthen their balance sheets by clearing debts and to acquire attractively valued commercial assets for portfolio expansion.
While the institutional landlords are predominantly focused on income yielding assets, they’re also willing to explore the potential of future development as the market fundamentals remain strong and resilient in india for office assests.
Product Standardisation is an evident outcome; There has always been robust demand for properties which are compliant, well – tenanted, with longer lease duration. Institutional landlords are now investing in amenities and building specifications with an emphasis on environment, health, safety and wellness as tenants plan their return to office. High quality building features and specifications, collaborative spaces, air quality etc are critical criteria for both investors and tenants. In the post covid world, the environmental, social and governance aspects of assets would be important investment considerations before deploying capital.
The shift in ownership patterns has influenced the way developers operate their assets. Strategies and implementation plan to meet these newer and evolving criteria focused on tenant experience, flexibility, sustainability and safety are being adapted and implemented – resulting in higher grade assets with emphasis on tenant engagement. The flip side is that the assets which do not meet these standards would now see a potential price discount and runs the risk of being perceived as of “lower value”.
India’s majority office space is still with large developers. As the markets continue to mature and grow, we might witness consolidation of portfolios and further evolution of ownership patterns. The positive shift in asset quality and standardisation would act as a catalyst to enhance India’s position as a sought-after destination and would go a long way in realising the true potential of India’s commercial real estate market.