Blackstone-backed Embassy plans India's first REIT

By Dhwani Pandya and George Smith Alexander

Embassy Group, an Indian partner of Blackstone Group LP and a commercial real estate developer, is laying the groundwork for the nation’s first real estate investment trust, which would open a market that’s attracted billions overseas.

There will probably be some progress by June, Embassy Office Parks Chief Executive Officer Michael Holland said of its plan to issue the bond-like securities. A draft prospectus may be filed by mid-year with the listing to follow a few months after, people familiar with the discussions said, asking not to be identified as the matter is private.

The offering from a company that counts Microsoft Corp. and International Business Machines Corp. as tenants would test investor appetite for real estate investment trusts, or REITs, after an underwhelming debut last year of similar securities focused on infrastructure assets. With the global REIT industry estimated at $1.7 trillion in a 2016 EY report, a successful launch would unlock a key source of capital for India’s real estate developers.

“We may see some developments in the first quarter,” of the year starting April 1, Holland said in a phone interview from Bengaluru. “At the moment we are assessing seven different special purpose vehicles for possible inclusion or exclusion into a REIT structure. It’s not certain that we will take seven, but we are working on documentation around seven different assets, which are in multiple cities.”

The size of the issue may be as much as $1 billion depending on what assets are finally included, said the people familiar. Holland declined to share details on banker appointments or the offering’s size, citing regulatory restrictions. Embassy Office Parks Management Services Pvt. applied to the market regulator for REIT registration in 2016.

A listing this year would follow a regulatory change to the ownership structure governing trusts, another in a list of tweaks made to invigorate the market since final guidelines were put in place in 2016. The first infrastructure trusts or InvITs to list have received a lukewarm response, with the IRB InvIT Fund of India Grid Trust issues trading below the issue price.

The Bengaluru-based Embassy is looking to invest 100 billion rupees ($1.57 billion) over the next three to five years to grow its portfolio of commercial office space, Holland said. It holds 25 million square feet of operating office and business parks and has a pipeline of about 15 million square feet, he said.

Here are some highlights from Holland’s interview:

Why do you think REITs will be attractive to investors?

• InvIT and REIT are completely different products -- different assets, different terminal value, different growth prospects. Real estate leases in India have contractual annual growth, market growth, renewal upside, growth through new buildings and upgrades.
• India is moving away from traditional hard assets, gold is an example, and into financial instruments. We have seen lots of money moving in to the mutual fund market, that is a big shift in the way which 21st century India is investing, and such changes to more liquid, managed instruments from well-reputed owner/developers will support significant domestic demand for REIT
• Pricing will be done in such a way to make it appealing as part of diversified portfolio.

What is your outlook on the sector?

• Southern markets like Hyderabad, Bengaluru, Chennai have been seeing declining vacancy and we see that trend continuing in many markets. Commercial rates have firmed up over the last two three years, and they will continue to be solid. Some second-tier cities like Thiruvananthapuram and upcoming Amravati city will also see good traction.