The biggest thing to happen to private real estate in India in recent times actually took place in the public market. In April last year, Blackstone, the New York-based mega-manager, partnered with Embassy Group, a Bengaluru developer, to launch the country’s first real estate investment trust.
Today, Indian managers are regarding the vehicle’s successful launch and early activities as a sign of progress and a necessary step toward fulfilling the promises of one of the world’s largest emerging markets.
Hitting India’s top stock exchanges on April 1, the initial public offering of the Embassy Office Parks REIT marked the end of an 11-year odyssey of regulatory tinkering. The Securities and Exchange Board of India opened the door to REITs in 2014 – six years after it began exploring the model – but it took another five years of fine tuning to bring the framework in line with counterparts in North America, Europe, Singapore and Hong Kong. Blackstone, which set up in India in 2006, was a key player in those formative discussions, working with Embassy to amass a portfolio of more than 30 million square feet to bring to the masses. The flagship vehicle raised 47.5 billion rupees ($660 million; €590 million), attracting bids on 183.5 million shares, well above the 71.3 million-unit offer.
While the Embassy Office Park REIT and its retail investors sit opposite the world of private equity real estate, its flotation is top of mind for the institutional money managers gathering here at Macquarie Infrastructure & Real Assets’ Mumbai office for PERE’s India roundtable. It represents, they argue, a sign of legitimacy for India’s still-fledgling property investment ecosystem, as well as a new source of liquidity for the notoriously shallow market.
“The fact that we have our first public REIT and it’s performed well really gives investors confidence to invest in a develop-to-core product, knowing that the REIT is a potential means of exit,” Nitin Gupta, managing director of MIRA Real Estate, says. “It wouldn’t be the only exit route we would look at, but it shows there’s a whole investment lifecycle that now exists in India.”
Beyond the headline items – the capital raised, the precedent set, Blackstone’s star power – the IPO demonstrates the maturation of India’s real estate offerings. For decades, the market was dominated by local operators, most of which were in the residential space, and many investors, both foreign and domestic, still see it that way.
However, that view has started to shift among real estate’s global elite, which have partnered with local firms, or put their own boots on the ground. Indeed, in the past five years, the most active buyers of Indian real estate have all been institutional investors or managers, according to Real Capital Analytics: Blackstone tops the list having outlaid $4.9 billion, followed by a pair of Toronto-based firms, manager Brookfield at $2.2 billion and the Canada Pension Plan Investment Board at $1.7 billion. Singapore-based manager Xander Group and GIC, the country’s sovereign wealth fund, round out the top five at $1.6 billion and $1.5 billion, respectively.
Yet, there are reasons why the second-most populous country on the planet, the fifth largest by gross domestic product, saw fewer real estate transactions in 2019 than even the comparably much smaller city-state of Singapore. From an unwieldy acquisition process to volatile politics, India has many hurdles to clear before it can deliver the returns hoped for by investors. Much of the country’s infrastructure is outdated and its residential development industry is dealing with a rash of distress. Economic growth is slowing and consumer spending is faltering. Also, its greatest strength, a young and growing population, could become its biggest vulnerability if it fails to create enough jobs to occupy them.
Ajay Prasad, managing director and head of India for Boston-based Taurus Investment Holdings, says the coming years will be pivotal for the country’s evolving real estate market and should make clear which firms have staying power in this new environment. “We’re finally in a window where we’ve started to get a good share of attention internationally and that’s partly because of the REIT, partly due to the investors that have come into India in the last 24-36 months,” Prasad says. “It’s a good time; it’s a challenging time, but it will be transformative. The next two years will separate the men from the boys, and we’ll see real estate become post-adolescent, finally.”
Buy global, build local
India’s property markets have no shortage of local players, but global capital is picking the winners. The pairing of domestic developers with international investors has become a common sight in major office markets such as Mumbai, Hyderabad, Bengaluru and the National Capital Region, as well as the industrial hubs of Chennai and Pune.
The most recent example of this came in the waning days of 2019, when Blackstone announced a $350 million joint venture with Hiranandani Group, a Mumbai-based developer. Together, the firms will build, own and operate 12 million square feet of warehouse and logistics real estate.
Similarly, commingled fund commitments are consolidating around just a few managers. In 2016, 13 funds accounted for $2.1 billion, according to PERE data. Two years later, the market saw roughly the same amount of capital go to just six funds, two of which are managed by Mumbai-based Kotak Investment Advisors.
“We are seeing the market mature very fast and we’re seeing very good signs of the market consolidating,” Gupta says. “We see a flight to quality. We see big players becoming bigger and weaker players moving out of the market. And, for the first time, we’re seeing opportunities across real estate classes.”
As the sources of capital for Indian real estate become more dynamic, so too do their assets. Relatively young and lacking in institutional-grade properties, the subcontinent’s booming metropolises still favor builders, but the investable stock grows by the year and increasingly caters to blue chip tenants. More than half the Embassy Office Park REIT, for example, plays home to tech giants such as Google, Microsoft and IBM, while 11 percent is occupied by global investment banks: JPMorgan, Wells Fargo and Goldman Sachs.
“Whether it’s New York, Hong Kong or Bangalore, companies want the same office in each location and are willing to pay for it,” says Ritwik Bhattacharjee, head of investor relations, Embassy Office Park REIT. “They want their offices to look alike and they want the same quality of labor in those offices. Somebody working at a global reinsurer in Bangalore can do actuarial analysis and model out catastrophic risk the same way a reinsurance company with those same offices in Zurich or Tokyo would have. It’s that level of sophistication that’s driving the quality of the real estate, you want your employees to function at much higher levels than they historically have. We’re not a call center country anymore.”
India’s emergence as a viable hub for high finance can be credited to an improved higher education system. Also, the large volume of English speakers – more than 120 million as of the last census, second only to the US globally – that made it a destination for outsourced telemarketing services a generation ago paved the way for its entry into global commerce. Since 2010, employment in the services sector has climbed from 24 percent to nearly 32 percent, according to the World Bank, while agriculture work dropped from 51 percent of the labor force to 43 percent.
Along with the services sector, industrial jobs have also ticked up from 22 percent to almost 25 percent, driven by manufacturing and, more recently, logistics to deliver e-commerce goods to an increasingly online population. Sharad Gohil, managing director of IndoSpace, a Mumbai-based warehouse and industrial real estate firm with 34 properties throughout the country, says the sector has become a hotbed for investment activity since his firm opened its first park in 2012.
“There has been a huge boom in e-commerce based on the consumption growth story across India, and you’re seeing a lot of institutional capital now backing logistics platforms,” Gohil says. “Capital seems to be taking long-term bets on specific sectors that they’re convinced are going to be here and provide them growth for the next 10 years and beyond.”
India’s modernizing economy has left no shortage of demand for premium real estate, but the country faces significant supply constraints. Prasad estimates the entire country has fewer than 700 million square feet of class A office space and even less depth in other asset classes, such as retail, which he pegs between 20 million and 25 million square feet nationwide.
Given those limitations, one of the biggest challenges is creating a platform of significant scale. Firms that can do so, however, are typically rewarded by the market. Bhattacharjee says that was a focus for Blackstone and Embassy when seeding the Office Park REIT portfolio. “You need scale, you can’t start with 5 million square feet in India. That’s not going to draw people’s attention and not going to float,” he says, “30 million square feet with some de-risked development and the rest of it essentially 95 percent occupied? That’s a game-changer and that’s what an international investor writing a public market check wants to see.”
Scaling up has also been a point of emphasis for IndoSpace, albeit a more daunting task considering the dearth of investment-grade warehousing in the country when the Everstone Group, a Singaporean manager, and Realterm, US-based logistics operator, launched the platform in 2007. The firm now has more than 30 million square feet, either under management or in development, including three new projects announced at the beginning of 2020.
IndoSpace’s scale has caught the attention of institutional capital. In 2017, CPPIB committed $550 million to IndoSpace Core, a joint venture focused on acquiring and developing logistics and industrial properties – some of which originated from the firm’s opportunistic funds – for long-term holds. The following year, GLP, the Singaporean logistics firm, acquired an ownership stake in IndoSpace.
Gohil says these partnerships are in line with a burgeoning trend in the Indian market: “A lot of LPs are favoring more focused investment strategies as opposed to pan-real estate asset strategies, which were there in the early stages of real estate private equity in India back in 2006-07 – those strategies are much more limited now.”
CPPIB, which opened a Mumbai office in 2016, is not the only Canadian pension active in the Indian market. QuadReal Property Group and Ivanhoé Cambridge, the real estate investment arms for the public employee retirement systems of British Columbia and Quebec, respectively, launched an $800 million Indian logistics platform of their own with LOGOS Property in 2017.
Similarly, Middle East sovereign wealth funds have been active in the market, both as buyers and sellers. The Abu Dhabi Investment Authority has added $400 million of property to its books in the last two years while the Qatar Investment Authority has exited close to $900 million of assets in the same timeframe, according to Real Capital Analytics. European investors, such as APG Asset Management, the Dutch pension investor, and Allianz, the German insurer, also have dedicated India programs.
“Curiously, what’s been absent from the market is investment squarely from US LPs,” Prasad says. “Some of them have deployed to a manager, but considering their scale, they’re probably a little behind the curve on getting into India directly. Otherwise, it’s the usual suspects. But very, very clearly institutions on the larger size of the spectrum as opposed to mid-sized and smaller institutions.”
Young country, same old problems
For investors of all sizes, the biggest draw to the Indian market is its robust population. With roughly 580 million citizens below the age of 25, according the US Central Intelligence Agency’s World Factbook, it has nearly as many young people as China, the US and Brazil combined. And, unlike the other three, India’s population growth has yet to taper.
The Internet and Mobile Association of India, a non-profit industry advocacy group, reported in September that 450 million Indians access the web monthly. Some estimates have the number at more than 600 million. Bullish investors see this as an early indication of India’s consumer potential.
“Our investors are the largest public markets investors in the world and they are still looking at the REIT over the long term because they believe the India story regardless of the India cycle,” Bhattacharjee says. “They’re thinking big, long-term runways and secular trends.”
Yet, activating such a large workforce has proved difficult. Labor participation among young Indians ages 15-24 – excluding those still in school – was 26.6 percent in 2018, according to the World Bank, down from 35.3 percent in 2010. Broader labor participation has stagnated to around 54 percent since 2012, even as GDP growth accelerated from 5.24 percent in 2011 to better than 8 percent in 2016, indicating that the population has outpaced the job market.
Meanwhile, along with the present and future challenge of employment, the real estate industry must also contend with long-running issues, such as an archaic entitlement system. Firms must often commit significant time and money to verify land ownership before breaking ground on a development, something that can typically be done online in most developed markets, Gohil says. Land procurement can be particularly laborious for industrial projects, most of which need to compile large swaths of rural land from multiple sellers.
“In India, by virtue of dealing in greenfield developments, the predominant challenge, as well as risk, lies in land aggregations,” he says. “Getting clear titles means having to go back 70, 80 years to check the title chain, which is a long process. When you’re buying between 30 and 200 acres of land, that diligence can take six to nine months. That varies region to region, state to state and city to city, so it makes having local knowledge, expertise and access to law firms that are specialists in those particular markets absolutely critical.”
Some states are attempting to alleviate this burden by aggregating land and setting it aside for development. In Maharashtra, home to Mumbai and Pune, the state’s Industrial Development Corporation aims to streamline the land procurement process. In Karnataka, which houses the booming tech hub of Bengaluru, the Industrial Areas Development Board advertises parcels based on their proximity to other corporations and access to modern infrastructure.
Embassy Office Park REIT’s successful IPO is a feather in the cap for both Indian regulators and the real estate industry at large, but this roundtable believes the true test will be if another firm – one without Blackstone’s resources and clout – follows in its footsteps.
Gohil says more public vehicles can, and should, come to market to further legitimize the real estate investment in the country. In addition to providing retail investors access to top notch assets, a healthy REIT market could prove a useful benchmarking tool for institutional investors, not only in the office sector, but across property types. “In my view, over the next two years, we’re going to see a strong volume of REIT listings, which will become a bona fide avenue for a lot of investors,” he says. “It could become a game-changer, not only for the office market, which you are seeing now, but also setting a precedent to where other real estate sectors may trade going forward.”
Other large managers active in the market are already rumored to be mulling a public offering and Embassy would welcome the competition, Bhattacharjee says: “We’d love to see [Embassy Office Park REIT] become the standard bearer for the REIT structure in India. When another REIT comes to market and you start seeing acceptance of the asset class, people feel secure that there’s enough of a foundation to and go out and raise more capital from the REIT structure.”
With more options for sourcing and structuring capital at their disposal, some managers are ready to go beyond the confines of the four traditional property types too and branch out into niche property types, such as co-living, student housing, senior living and data centers. As with warehousing and logistics a decade ago, these products are essentially non-existent in India, Prasad says, giving an opportunity to anyone willing to take it. “With these asset classes, there’s a blank slate right now. Even for international investors, there is a level playing field. It’s not like there are 10 data center investors out there and you need to piggyback on one of them. You can start from scratch.”
That such alternatives are even topics of conversation speaks to the progress of Indian real estate, Gupta says: “Overall, the risk-adjusted returns that have been realized in the recent exits from the Indian real estate market have been very attractive right now and I think that’s why we see more dialogues happening where both existing and new global investors are coming forward and discussing opportunities across risk profiles and across sectors.”
Although market-wide performance is difficult to track, Gupta cites CPPIB’s sale of a Chennai technology park to Singapore-based Mapletree Investors for $187 million and a 28 percent internal rate of return in 2018; the 40 percent appreciation of the Embassy REIT since listing, and high double-digit returns on exits for groups such as New Jersey-based New Vernon Capital, New York-based Tishman-Speyer and GIC in 2019, as recent successes. Coupled with a wider selection of properties and investment structures, he says the market has evolved significantly: “Investors have the opportunity now to deploy capital immediately to buy core assets or buy land parcels that have all the approvals in place. This is something I never saw 10 years back.”
Despite a flurry of recent activity, India occupies just a small space in the portfolios of Blackstone and Brookfield, accounting for just 1 percent of their real estate investments over the past two years. US institutions, for the most part, have ignored the market and, in some respects, they are woefully behind the times. Yet, strong demographics, a diversifying economy and the confidence of some of the deepest pools of investment capital continue to work it its favor. After a historic year in 2019, a mature Indian real estate market seems to be within sight this year.