Embassy REIT may ‘return’ 14% in the long run

Rashmi Pratap Mumbai | Updated on September 26, 2018

Growing office space demand and rentals, a big positive

  Embassy Office Parks, India’s first REIT or real estate investment trust, is likely to generate an average annual return of 14 per cent over a five-seven-year period in a market where office space rentals have been growing with demand.

Embassy Office Parks, a joint venture between US private equity giant Blackstone and Embassy Group, is looking to raise around ₹5,000 crore through its 32.6-million square feet portfolio. “In the last few years, both pension and general funds have been very bullish on commercial space, and REITs will be a good vehicle to create and realise the value these set of assets have created,” Jagannarayan Padmanabhan, Director, Crisil Infrastructure Advisory, told BusinessLine.

The first quarter of this year saw a 23 per cent increase in the office space demand. In the last few years, the demand for office space has been outstripping supplies. “Indian investors are ready to cash in on this growth. We estimate 12-14 per cent overall returns over a five-seven-year period,” said Anshuman Magazine, Chairman, India and South-East Asia at CBRE.

Capital appreciation

REITs are also likely to be more successful than infrastructure investment trusts or InvITs due to the difference in the two investment options. In an InvIT, capital appreciation is limited as assets, like oads, do not appreciate with time but cash flows are certain. “In REITs, there is also capital appreciation of assets over a period,” said Padmanabhan. Moreover, REITs have to allocate 90 per cent of annual yield as dividends, ensuring a steady cash flow for investors.

While stock markets can also generate returns in the 15-20 per cent range, REITs are more stable investments. “In REITs, there is an inherent built-in stability compared to the stock market, which can be volatile. The cash flow is visible and there is not much quarterly variation in term of sales as leases are locked in for longer terms,” Magazine said.

That makes REITs attractive for all types of investors. Globally, in the US and Asian markets, REIT is an alternative investment tool in addition to other asset classes. “It is favoured by institutional investors as well as retail investors who have long-term income requirements. Retail investors here currently have limited avenues as gold has been subdued and stock markets are not doing too well. REITs will provide easy entry and exit in real estate,” he added.

Long-term bet

Padmanabhan said REIT is clearly for investors who have a longer term view, want steady cash flows and are keen to participate in their area of interest — real estate. However, compared to other developed Asian markets, such as Hong Kong and Singapore, India has a lot to catch up with. “In terms of issues, this (Embassy) is just starting out here. We are still lagging behind, but if return expectations are set rationally and follow through happens regarding delivery of those expectations, there is certainly a market available for REITs in India,” Padmanabhan added.

Published on September 25, 2018

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