Blackstone, Embassy Prepare for $1B IPO of India’s First REIT

Private equity giant Blackstone and Bangalore’s Embassy Group are getting ready to list India’s first real estate investment trust as they target a $1 billion September IPO for a joint venture business park porfolio.

The New York-based investment group and its Indian partner are targetting a market cap of between $4 billion and $5 billion for their Embassy Office Parks REIT, according to reports in the Indian press.

Indian Business Parks to Hit the Market in September

The proposed Blackstone-Embassy REIT has a portfolio for 23 million square feet (2.1 million square metres) of business parks, including the Embassy Manyata Business Park and the Embassy Golf Links park in Bangalore. The portfolio also includes a pipeline of potential projects which could be developed to provide another 10 million square feet of space.

Blackstone currently holds a 43 percent stake in the portfolio, according to an account in the Times of India, while billionaire Jitu Virwani’s Embassy holds 25 percent and acts as the trust’s manager. The remaining 32 percent of the portfolio is held by stakeholders in the projects within the portfolio.

Annual net operating income for the assets in the portfolio is reported to be rupees crore 2,200 ($323 million) with a cap rate of between 7.5 and 8.0 percent.

Securities houses Morgan Stanley and JM Financial are working on the late-September listing, with a draft prospectus expected to be filed in July.

Reaching the End of an 11-Year REIT Journey

The imminent listing of India’s first REIT comes after a long slog through India’s famously glacial regulatory process.

REITs were introduced in US markets in the early 1960s, and spread globally to become a $1.17 trillion industry by 2017 — but not in India, which has been struggling to adopt the publicly listed investment vehicles for more than a decade.

The Securities Exchange Board of India (SEBI) first proposed REIT-listing regulations in 2007, which underwent review through 2014, and were considered finalized in 2016.

The end result is that the investment regulator has proposed listing rules broadly in line with developed nations, reports consulting giant PricewaterhouseCoopers.

In 2017 the Reserve Bank of India (RBI) announced that Indian banks will be permitted to invest in REITs and listed infrastructure trusts up to a 20 percent shareholding, creating more incentives for institutions to take up REIT units.

The RBI ruling is thought by experts to free up substantial capital for subcontinent REITs. Indian authorities also issued rulings in 2017 allowing insurers and pension funds to invest in REITs and InvITs, within certain guidelines.

Another sign of progress comes via an announcement earlier this month that India financial services firm IIFL Holdings Ltd had also registered with the Securities and Exchange Board of India (SEBI) to create its own REIT, although details of the planned listing were not made available.

Rising Rates Cast a Shadow Over Impending Listing

Government thickets there have been for India REITs, but now Blackstone-Embassy may face market hurdles in the form of rising interest rates and investor expectations.

The US Federal Reserve has been upping rates since last year and promises further increases, while the Reserve Bank of India (RBA) raised its key 0.25 percent to 6.25 percent in June, and is expected to hike again in August. With higher interest rates looming, investors may want a 10 percent distributions or higher for a Blackstone-Embassy REIT to be successful, said analysts.

The mediocre track record of infrastructure investment trusts (InviTs) in India also casts a pall over the potential for REITs in the country. Two InvITs have arleady been listed on Indian exchanges, the IRB InvIT Fund and Indiagrid Trust. Unfortunately, the two InvITs have fared so-so to poorly, and are down from their IPO prices.

With a growing population now at 1.32 billion and one of the world’s fastest growing economies, real estate in India certainly has a future. The time may have finally arrived for REITs to play their role in that prospect.