The initial hurdle has been cleared: India’s first ever REIT has got its investor endorsement. The 47.5 billion rupees ($690 million; €610 million) initial public offering of the Embassy Office Parks REIT, which wrapped up last week, ended up 2.57 times oversubscribed. As of the last day of the sale, investors bid for 183.5 million shares – each share issued at 299-300 rupees – versus the 71.3 million on offer.
If there was one candidate most likely to get this job done it was Blackstone given its scale in the country. The New York-based firm is one of the biggest owners of office assets in India, having invested approximately $1.8 billion of equity to acquire an interest in around 115 million square feet of property.
The REIT offering – a joint venture between Blackstone and the Bangalore-based developer Embassy Group – comprises a portfolio of seven office parks and four office buildings, totaling 32.7 million square feet of leasable area, with a 95 percent occupancy, as of December 31, 2018. In the draft offer document filed with India’s market regulator in September, the sponsors described their REIT as the largest among comparable Asian office REITs.
The listing ends years of anticipation surrounding the fate of the Blackstone – Embassy REIT as well as the overall REIT regime in the country. Those tracking Indian capital markets know how arduous this process has been. REIT regulations were enacted in India four years ago, but several hurdles, including tackling concerns about the proposed structure, kept delaying any debut offerings.
There was also little clarity in regard to how domestic investors would respond to a new investment product like this – despite their adoption in other markets. High-net-worth Indian investors had little idea whether, from a risk-reward standpoint, a REIT was akin to investing in a debt or equity product, mutual fund or a fixed deposit. To compound uncertainty, in the run-up to the Blackstone-Embassy REIT listing, the drop in the value of the rupee –nearly 14 percent against the dollar between last April and October – added to the list of headwinds. Those concerns eased coming into 2019, however, with a 1.9 percent gain recorded by the rupee against the dollar in the first quarter.
Non-institutional investors, including corporates and individuals, ended up engaging most, subscribing to the listing by 3.1 times. The offering drew substantial interest from institutional investors as well, however, with a 2.15 times subscription. One analyst told us the response from the institutional base was expected to be even higher, but uncertainty preceding the upcoming general elections in May might have prompted some investors to hold off buying units for now. Either way, in its oversubscription, the first litmus test for India’s first REIT was ultimately passed.
The next test comes in its performance. Ensuring the product delivers adequate returns to first-time Indian REIT investors will be crucial in determining the success of this regime and its viability as an exit channel for institutional money. No doubt Chinese regulators will be watching with interest given China’s plans for its own REIT program.
What the appropriate yield should be remains debatable for now. The Embassy Office Parks REIT is understood to be targeting a net yield of approximately 8 percent. Compare that with a Singapore-listed REIT, for instance, that has operating assets in India and currently trading at around 5 percent dividend yield and you might say an approximately 300 basis points spread between the two products is a good enough risk premium for investors.
Some PERE sources believe the spread should be wider, though. One adviser says an Indian REIT should be providing as much as gross 12-13 percent to be truly comparable, given currency and tax implications. Perhaps one could describe India’s first REIT as carrying a Blackstone premium given its prowess elsewhere in real estate markets.
Whatever the return ultimately is, it sets the bar and with that, potentially, it further substantiates the institutionalization of the asset class in India – something undeniably welcome after a number of false starts.
Write to the author, Arshiya Khullar: firstname.lastname@example.org