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India’s first REIT: Five things that you need to know about the BlackStone Embassy listing

India’s first REIT: Five things that you need to know about the BlackStone-Embassy listing

India’s first REIT: Five things that you need to know about the BlackStone-Embassy listing
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By Manisha Natarajan  Aug 7, 2018 7:01:12 AM IST (Updated)

The Blackstone REIT will also set the benchmark for a viable exit for private equity players and developers who’ve invested heavily in India’s office and commercial real estate in recent years, writes Manisha Natarajan.

One year, bated breath, no REIT. Now we learn that the first Real Estate Investment Trust (REIT) application is after all due to list on August 14, 2018. The surprise element is that it could well be a majority Blackstone Group REIT, rather than Embassy Office Parks as was originally envisaged.

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Jog down memory lane, it was the Embassy Group that registered its REIT —a company that owns, operates or finances a real estate asset that generates income — with market regulator Sebi in July 2017. Embassy’s was the first such realty trust in the country to do so and its aim was to monetise some of its marquee Grade A rent yielding office assets, improve cash flows and retire debt.
Over the course of the year though, the colour of the first proposed REIT has changed substantially. It seems assets owned and shared by Blackstone will make up for 80 percent of the proposed REIT while Embassy Group assets will be under 20 percent.
Here are five things about the REIT that you need to know.
1) Blackstone Group LP, the biggest private equity investor in the Indian real estate space, with a portfolio of  $5 billion plus, will lead India’s first REIT with 80% share of Blackstone-Embassy REIT. The iconic Express Tower in Mumbai, The 247 Park in Vikhroli, Blue Ridge Special Economic Zone (SEZ), another IT SEZ that it bought from DLF in Pune and Galaxy IT Park & Oxygen Boulevard in Noida are amongst Blackstone’s assets that will be a part of it.
In the proposed REIT, you will see a dominance of Blackstone assets — the iconic Express Tower in Mumbai, The 247 Park in Vikhroli, 1.5 million-sq-ft Blue Ridge Special Economic Zone (SEZ), another IT SEZ that it bought from DLF in Pune and Galaxy IT Park & Oxygen Boulevard in Noida. The Pune assets are those that Blackstone has in the past attempted to liquidate through an outright sale to other investors such as Capital Land and Zander.
2) Embassy Office Parks on its part will now exclude Embassy Tech Village from the REIT and most of Embassy GolfLinks Business Park. Only 8 percent of Embassy GolfLinks will make it into the first REIT, and that too as shares listed within the 20 percent block reserved for under-construction projects and investments. The latter asset is owned in a JV partnership with KJ George, who is a minister in the Karnataka government.
What will make it to the REIT from the Embassy Office Parks portfolio are Embassy Manyata Business Park, Four Seasons Hotel at Embassy One both in Bengaluru and Embassy Tech Zone in Pune. Embassy shares in the REIT will be close to 17 percent, according to people familiar with the matter.
3)   There is substantial global investor interest in the India office space story. In investor roadshows, large banks such as Nomura and JP Morgan Chase have expressed significant appetite for the Blackstone-Embassy REIT. Today, on the back of high occupier demand led by IT, financial services and co-working spaces, yields are a healthy 8.5-9.5 percent for Grade A prime office locations at Bengaluru, Mumbai, Gurgaon and Hyderabad. These cities now rank amongst the highest for rental yields globally. Most of these markets, barring Mumbai, have also clocked double-digit growth in rentals since 2015, according to Cushman & Wakefield.
4)   The only dampener for Indian investors, especially the retail investor, could be the rising interest rates. RBI has raised rates twice this year, taking the repo rate (rate at which lends to commercial banks) to 6.5 percent. The capitalisation rate on India’s first REIT is likely to hover around 7-7.5%.
Which begs the question — will investors bite? They will, believe the sponsors, if they bet on the demand buoyancy, rent revisions and rising rentals. According to JLL, several of the office spaces that will be part of the Blackstone-Embassy REIT are due for old tenant replacements. Long-term contracts that have been signed in more recent years have a strong annual escalation built into them.
5)   The likely size of India’s first REIT is estimated at around Rs 5,322 crore, with an enterprise value of Rs 34,000 crore. While the composition of the REIT portfolio has now been agreed upon by all stakeholders led by Blackstone, several loose ends still have to be tied up and paperwork completed for the REIT to make it to the August 14 proposed application date. If the August deadline is missed, then the next possible opportunity will get pushed to beyond 2019 Lok Sabha elections.
That will be a pity, considering the sector needs to unlock valuable capital and redeploy funds for the next leg of growth. The Blackstone REIT will also set the benchmark for a viable exit for private equity players and developers who’ve invested heavily in India’s office and commercial real estate in recent years.
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