Embassy Office Parks
plans to raise around Rs 4,750 crore via India’s first real estate investment trust (
) listing, which opens on March 18. The REIT, which includes Embassy Group properties, will offer units at Rs 299-300 a piece.
The Embassy Office Parks REIT is a joint venture between Bangalore-based property developer and private equity firm Blackstone. Embassy’s portfolio comprises seven office parks and four city-center office buildings totaling 32.6 million square feet (msf) as of March 31, 2018 in Bengaluru, Pune, Mumbai and Noida.
In a conversation with ETMarkets, Vikaash Khdloya, deputy CEO & COO, Embassy Office Parks explains how the product is very popular among international investors, and how they plan to focus on India story as of now. Edited excerpts:
You have been doing road shows, how has the awareness been amongst investors?
Vikaash Khdloya: International institutional investors are pretty aware because it is an established asset class and they have been participating in REITs for quite some time. On the domestic side, we did spend time because it is a first of a kind product. We wanted to ensure that we are patient and completely focussed on optimal transaction execution. So we spend some time with the domestic investors. Real estate is something, which every Indian understands really well. We just had to kind of focus on what is REIT as a product. Internationally, people were very aware and it was very fantastic feedback in terms of growth in India, and domestically as well I think the feedback we got was really positive.
But there were reports wherein they said mutual funds were not completely keen on this product. Is that true?
Vikaash Khdloya: I cannot comment on that just because I am not allowed to under the framework. But what I can say is once the anchor book list is out on Friday or early Monday once we disclose it to Sebi, you will see there are quite a good list of both domestic and international investors in that list.
Sebi’s regulations on REITs came a few years ago. Why did it take really so long to hit the market?
Vikaash Khdloya: There were a couple of reasons. It took time just to ensure that we also have the best portfolio possible to bring to market. We wanted to be the first to come to the market. So, it took time to just get the portfolio in shape in which it is today. Mike (CEO Michael Holland) and I have been working together for five to six years now on the product. We wanted to have a large scale high quality diversified portfolio in the right markets of the right cities. So, for example, for Bangalore and Pune I have seen rental CAGR over the last five years of 10%. Bangalore in fact continues to be one of the best markets in terms of numbers globally
Two, of course, the regulator has been fantastic the way they have brought in the regulations. REITs being a first time product, it took some time to ensure we iron out all the issues and regulators have been supportive and kind of very helpful at every stage. So we were never in a hurry to kind of get this off onto the market. I think now is a right time. Business fundamentals could not be better. Also, the demand and the portfolio quality. We think this is the perfect time.
You focus largely on obviously tier one cities, are you looking at tier two as well going ahead?
Vikaash Khdloya: So the way we look at the business, we have got four key markets. While we specifically do not decide on which city to look at or not, we obviously look at good asset quality. A lot depends on the growth profile and the return profile of new assets which you look at but the two cities which we are keen to kind of expand into in due course at the right time, right prices is Chennai and Hyderabad. I think the fundamentals in these two cities are also pretty good. In fact in Chennai we have a ROFO (right of first offer) asset which currently is under construction, lot of construction component there it is a 5 million sq feet (msf) asset but only 0.9 msf is completed. So you know from a SEBI 80-20 rule perspective, we will wait for some more time and there is a lot of construction risk so we will look at it may be in two years or two and a half years time when it is more stabilised. Hyderabad — I think has also been one of the better markets in the last two years or so. These are the two markets we have in our mind and then anything else which is opportunistic we may consider.
Would you think there is considerable opportunity in tier two cities as well?
Vikaash Khdloya: I would say that there is the opportunity is more real and both in terms of size, in terms of the dynamics etc. in the top six cities which we spoke about which is the four cities we are in plus Hyderabad and Chennai. Tier two what we have seen is we will have to keep in mind and some tier two cities may present opportunities of scale. We want the quality and scale because end of the day if you have quality asset you always charge a premium. Across our portfolio, we charge a rental premium but if you are into lowering the rent and rent competition then you will always be a downward spiral both in terms of quality and the rent.
And what is your outlook for office rent of your company and industry at large?
Vikaash Khdloya: I cannot make forward looking comments. But we have seen in the nine months that it continues to be solid… it is a good structural shift over the last four to five years in terms of global occupiers whether it is a Google, Microsoft, or JPMorgan. They are looking at institutional landlords for spaces, all of these are tenants with us. So, there is a shift in terms of the quality that the tenants are looking for. We aspired to actually target tenants who do high value added work in services because they are the ones who would value the quality and they are the ones who would be ready to pay the premium rentals that we have. So we think the demand-supply dynamics and the business fundamentals are pretty attractive.
One more thing as someone pointed here that there is too much dependence on IT technology space in a portfolio, is there sense of caution also that there…
Vikaash Khdloya: We have a 49% of our revenue come from IT companies but that includes let us say Googles of the world as well so that IT, it is a large bucket.If you see from 2000 onwards till now, the amount of space IT has absorbed has gone up by more than eight times. We think that that is a pretty significant number. IT continues to be one of the highest contributing segments of GDP growth. So I think that also kind of makes a case that this industry is here to stay. Apart from that what I would also say is that we have also seen demand from the other sectors and over 50% of our revenue come from other sectors which is also growing. So we do not think while we have obviously mentioned the risk factors that it is a concentration risk and something we would want to highlight. From the IT companies’ perspective, India is a very compelling opportunity in terms of the quality of space, the arbitrage that Indian services can offer. It is around 85% cheaper to get the services done in India than anywhere else in the world. We think we are in good shape on IT.
And how are you going to use the proceeds of the IT?
Vikaash Khdloya: Yes so we are raising Rs 4,750 crore. Out of this Rs 4,750 crore, around Rs 3,710 crore go to repay down existing debt. So the entire Rs 4,750 crore is a primary, so there is no secondary by the existing shareholder/sponsors. So, apart from the debt repayment of Rs 3,710 crore, we have approximately Rs 460 crore, which we are using to acquire Embassy one assets. The balance will be used for corporate purposes and issue expenses.
Can you buy assets overseas as well?
Vikaash Khdloya: So we intend to be make it a commercial real estate story, but India story. So, we are focussed on India.