Blackstone Kicks Off $722M IPO for India’s First REIT

India’s first real estate investment trust – the Blackstone-sponsored Embassy Office Parks REIT – kicked off its IPO on Monday with the manager filing draft documents with the regulator.

The country’s maiden REIT will debut some four years after the Securities and Exchange Board of India published REIT rules in September 2014.

INR 40 billion of the INR 52.5 billion ($722 million) IPO proceeds (before over-allotment) will be used to pay off loans taken out by the SPVs holding the REIT’s underlying assets.

Blackstone and its local partner, India’s Embassy Group, are marketing the REIT to growth-focused investors eager to profit from the rents paid by units of global firms such as IBM, JP Morgan, Google and McKinsey that already are occupying the business park and city centre offices included in the portfolio.

Buying Rights to Bangalore Office Park Rent

Unit-holders in Embassy Office Parks REIT will receive income from 74 buildings across seven office parks and four city center office buildings which generate annual lease revenue of INR 20 billion.

As previously reported, Blackstone added Mumbai office buildings to the REIT – including its 50 percent stake in First International Financial Center (FIFC) – while Embassy Tech Village was not included.

Overall, the REIT includes properties in Embassy’s home base of Bangalore (namely Embassy Manyata and Embassy One office parks along with Embassy Golflinks, a Four Seasons Hotel and three Hiltons); Mumbai (FIFC, 247 Park and Express Towers); Pune (Embassy Techzone, Quadron and Qubix office parks); and Noida (Embassy Oxygen and Galaxy office parks).

With some 32.6 million square feet (msf, 3.028 million square meters) of leasable area (including 24.2 msf built), the REIT will be Asia’s largest office REIT ahead of Singapore-listed Ascendas India Trust (which has 18.2 msf with 12.8 msf built) and Tokyo-listed Nippon Building Fund (11.7 msf built) according to the document.

Growth Opportunity

Blackstone and Embassy will be marketing the REIT as a growth play, offering an annual yield of around 6.5-7 percent compared to a 7.5 to 8.5 percent operating income yield for India.

Portfolio revenue from operations is projected to grow by 54.3 percent over the fiscal 2019-21 projections period according to the offer document, which does not incorporate any growth from acquisitions – despite opportunities to buy assets from sponsor Embassy Group which has a pipeline of some 50 msf of commercial real estate.

The strong growth is in part because market rents “are 34.5 percent above in-place rents,” offering potential for higher re-lease rates. Some 1.9 msf has been re-leased at rents averaging 47.4 percent above in-place rents at expiry over fiscal 2016-18. Typical leases are for 9-15 years with built-in contractual rent escalations of 10 percent to 15 percent every three to five years.

Low Build-Out Costs Boost Returns

Further, tenant improvement capital expenditure is around 2 to 5 percent of rental revenue (compared to 15-20 percent in the US) as tenants incur the cost of fitting out space themselves as leases are “typically on a ‘warm shell’ basis” in India.

Embassy Office Parks achieved an 86.3 percent tenant retention rate over the past three years.

Services sector tenants accounts for 71.9 percent of the REIT’s 160 tenants, with technology companies accounting for 49.5 percent of gross rentals and 58.2 percent of occupied space. The top two tenants – IBM India and Cognizant Technology Solutions – accounted for 26.2 percent of gross rentals in the 2018 fiscal year ending March this year.

Other tenants include JP Morgan, DBS, Swiss Re, Google, McKinsey, IBM, L&T Technology Services, Nokia and Microsoft. Occupancy has been maintained at over 93.4 percent over the last three fiscal years with 95 percent committed occupancy in fiscal 2018. The weighted average lease length of 6.9 years.

Focused on Tech Tenants

Technology tenants are expected to continue to be the main focus, with the majority of the REIT’s assets on land in Special Economic Zones (SEZ), which stipulate leasing to IT and IT services sector tenants.

According to the offer document new jobs in the technology sector will add some 102 msf additional office demand in India to 2022, followed by office demand from financial services expansion (81 msf) and media and entertainment (52 msf).

Meanwhile, the country’s commercial capital Mumbai is the location of the REIT’s office buildings, including: Express Towers in Nariman Point; part of First International Financial Center in Bandra-Kurla Complex and Embassy 247 Park in Vikhroli-Mumbai.

Overall, the Mumbai office buildings account for 16.6 percent of the INR 301 billion market value of the REIT’s assets according to the draft offer document, which claims “there is no other office portfolio of comparable scale, diversity and quality in India today”.

Morgan Stanley, JP Morgan, Kotak Mahindra and BAML are global coordinators and book running lead managers for the IPO. Axis Capital, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, IIFL, JM Financial and Nomura are also book running lead managers.