India: Slowdown in office sector puts investors, REITs in a corner

High rises in Mumbai, India. Photo by Joel Steevan on Unsplash

The end of a seven-year bull run in India’s office development is expected to squeeze rentals and hurt real estate investment trusts (REITs), putting top property investors in a spot.

The boom in India’s commercial office properties was led by huge demand, foreign investments, falling vacancy rates and rising rentals. The COVID-19 outbreak has delayed project completion, softened rentals and sapped demand, at least for the next few months.

Blackstone Group Lp, India’s top office space owner, has $19.4 billion assets under its real estate portfolio in the country, across 39 investments since 2006. As rentals and office absorption rates fall, companies that own rent-yielding assets will find their revenues squeezed.

Property developer Salarpuria Sattva Group, along with Blackstone, bought Bengaluru’s Global Village Tech Park earlier this year for around 2,500 crore in one of the largest office deals in recent times. According to Bijay Agarwal, managing director of Salarpuria Sattva, there will be a softening in office rentals by 5-10% for a couple of quarters, though a longer-term impact is unlikely.

With US and Europe hit hard by the pandemic outbreak, global companies, which contribute the bulk of the office space demand in India, may rework their plans, delaying leasing decisions and prompting rental renegotiations by new and existing occupiers.

Blackstone is a majority shareholder in Embassy REIT, which has a 33 million sq. ft portfolio. Embassy Office Parks said it has faced minimal impact on business owing to its marquee tenant roster.

Mindspace Business Parks REIT—backed by K. Raheja Corp. and Blackstone—had filed its draft prospectus with the Indian markets regulator in December, but the initial public offering has not been launched.

Blackstone declined to comment to an email query.

Anarock Property Consultants in an April report said the net absorption of office space is likely to drop by 17-34% in 2020 from pre-covid-19 projections.

REITs are also likely to see lower yields due to deferment of new office leases and zero rent escalation in the near term, as the pandemic and lockdown curbs cripple companies worldwide.

“Though the occupancy and rentals for large commercial complexes may mostly remain stable for now, tenants may defer the signing of new leases till they can recalibrate their needs to the post-COVID scenario. In that case, the overall REIT valuations will be influenced by a combination of factors like low yield environment, defensive nature of the sector, the stability of rentals and pace of new leasing or re-leasing of office space,” said Subhrajit Roy, executive director and head, equity capital market origination, Kotak Investment Banking.

Roy added that while rent collections for large office developers in April have been over 95%, with most clients honouring their lease contracts, there may be some renegotiations on lease terms for tenants like multiplexes, retail malls and food courts.

“Construction delays will happen and occupiers will take longer to make decisions, resulting in a 20-30% drop in lease or absorption rates. However, because de-densification will be a huge thing, companies may need larger offices to accommodate their workforce,” said Ramesh Nair, country head and CEO, JLL India.

According to Shobhit Agarwal, chief executive and managing director, Anarock Capital, most office developers also had to forgo their rental income from restaurants, food courts, gymnasiums and shopping in office parks, which typically could form about 10% of their office portfolios.

This article was first published on livemint.com.

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.