|25 September, 2019

Indian office towers rise above economic slump

Returns are more lucrative in the prime commercial market, where supply has kept better pace with demand

A general view of Mumbai's central financial district, India June 13, 2017.

A general view of Mumbai's central financial district, India June 13, 2017.

REUTERS/Danish Siddiqui

MUMBAI - It's getting easier to access Indian office towers. A Blackstone-backed $4 billion commercial real estate investment trust, the country’s first of its kind and the largest in Asia by square footage, has defied a broader economic slowdown and been well-received since its market debut six months ago. It heralds more opportunities to enter this higher-yielding market.

Property investing for Indians used to mean buying houses for cash, mostly hidden from tax authorities. New regulations and levies make it harder and have contributed to a massive oversupply. It would take 31 months to deplete existing inventory, according to analysts at financial services outfit Edelweiss. They reckon home price growth has tumbled from an average annual rate of 9% earlier in the decade to as low as 1.3%. Rental yields are stuck below 3%.

Returns are more lucrative in the prime commercial market, where supply has kept better pace with demand. Multinational tenants such as IBM and JPMorgan also have forced landlords to be more fastidious. Large investors, including Canada’s Brookfield Asset Management and international pension funds, have piled in buying entire office buildings.

The initial public offering of Embassy Office Parks REIT , the Blackstone venture with 33 million square feet of top-notch sites in Bengaluru and beyond, has opened the doors to a bigger group of investors. A dividend yield that exceeds 6% will be enticing as GDP growth and interest rates fall. A 27% increase in the stock price should inspire copycat real estate collections, especially for cash-strapped developers who may need to offload parts of their portfolios.

Entrepreneurs are also seeking to capitalise. Startup hBits, for one, is courting investors by offering fractional ownership of office space. It is touting potential returns of up to 18.5%, from a combination of rental income and value appreciation, with a minimum investment of about $35,000.

An accelerated downturn worldwide or a weaker India would lead to higher vacancy rates. They tripled to over 20% after the global financial crisis, but have fallen again, to below 14%. And as the number of REITs increase, it will be important to keep an eye on regional differences in quality. For now, this is a welcome Indian property development.

CONTEXT NEWS

- Shares of Embassy Office Parks REIT closed on Sept. 24 at 393.90 rupees a share, a 28% increase since the company listed on April 1. The Blackstone-backed commercial property venture is India’s first publicly-traded real estate investment trust, and the largest in Asia by square footage. It owns and operates 33 million square feet of so-called Grade A, or high-quality, office parks and centres across Mumbai, Pune, Bengaluru and the National Capital Region.

(Editing by Jeffrey Goldfarb and Katrina Hamlin)

© Reuters News 2019