The Indian office sector remains appealing to global institutional investors, despite the structural challenges posed by the pandemic.
Capital flows into Indian real estate touched $1.78 billion in Q4 2020, a 21 percent year-on-year increase, with the office sector accounting for the dominant share of these investments, according to CBRE’s India market monitor published in February.
Earlier this month, Ivanhoé Cambridge also made its first direct office investment in the country by partnering with the Bangalore-based real estate developer Embassy Group. The platform, which has a $500 million total investment capacity with Ivanhoé Cambridge and Embassy Group investing at an 80:20 ratio, will invest in develop-to-core and acquisitions of partially developed office business parks.
For Ivanhoé Cambridge, which has $500 million in committed assets under management in India, the venture was an outcome of discussions that were in the works for around 18 months. The coronavirus outbreak did not alter its long-term views on the office sector; Chanakya Chakravarti, managing director for India at the firm, told PERE that Ivanhoé’s conviction has not changed as far as India office is concerned.
“We think this is a blip,” Chakravarti said of the covid-19-triggered market uncertainty. “The structural trends are very much intact. There is evidence of that playing out during this uncertain period, with the number of commitments that have been fructified and new investments made.”
The structural demand for Indian offices, especially in the technology space, is being driven by the growing appeal of India as a preferred global outsourcing destination on the back of low-cost knowledge talent, as CBRE highlighted in its report. This has sustained office leasing momentum by global corporates, especially in markets like Bangalore, Hyderabad and Delhi-NCR. In Q4 2020, office leasing was estimated to be 9.9 million square feet, and 75 percent of this activity was taken up by these three cities.
The Ivanhoe-Embassy platform will initially focus on Bangalore, alongside Chennai. In terms of strategy, both partners believe a build-to-core approach currently offers better economics than a core-style investment.
If you come to a geography like India, headline returns must be in the high teens to low 20s, otherwise the risk-reward does not make sense.
– Chanakya Chakravarti
“From an investor’s point of view, cap rates are getting competitive,” said Aditya Virwani, chief operating officer at Embassy. “The amount of opportunity you have on the core side is limited for grade A assets. In addition, we have also seen strong rent growth, so this is allowing investors to take that [develop-to-core] risk and enjoy the premium that comes with it.”
“If you come to a geography like India, headline returns must be in the high teens to low 20s, otherwise the risk-reward does not make sense,” added Chakravarti when asked about the ideal returns that ought to be earned from a develop-to-core venture in India.
The Indian real estate market has also become more institutionalized over the past few years, with the passage of several investor-friendly regulations as well as the creation of a successful REIT regime providing a viable exit avenue for private equity capital. Embassy was the sponsor of India’s first REIT alongside Blackstone – the Embassy Office Parks REIT – which had a successful listing in 2019. Since then, there have been two other REIT IPOs: the Mindspace Business Parks REIT and the Brookfield Real Estate Investment Trust. At the same time, there has also been a consolidation trend among Indian managers and developers triggered by a stringent financing environment.
“The Indian real estate space does not look anything like it did five years ago. We think this is going to result in the bigger players getting even bigger,” said Chakravarti. “With the advent of global institutional investors, the market is in the throes of a thorough formalization exercise. You have spreads close to 300 basis points, healthy economics on a build-to-core basis, with operators who have 30 million to 50 million square feet and a deep understanding of what a global tenant wants. Those are factors that get investors very interested, notwithstanding what is going on currently.”
According to Chakravarti, none of the major economies in Asia or in the western hemisphere can generate these kinds of spreads.