Indian Commercial Realty Future-Proofs Itself

Sudeep Aditya, Entrepreneur, Co-Founder, Oakbridge Asset Partners Last fortnight saw the closure of two landmark transactions with a collective value of Rs. 27,000 crore (US $3.6 billion) between noted realty firms RMZ and Prestige and private equity (PE) funds Brookfield and Blackstone, respectively. These transactions (along with the successful listing of the Embassy and Mindspace REITs) ushers in the maturing of India’s Commercial Realty sector and its global relevance as a destination for high-quality institutional capital. The said transactions also draw in the following inferences:

1. At this scale, Bangalore is by far one of the largest commercial realty markets in Asia, not just India. Bangalore attracts a disproportionate amount of IT Office development due to its being a large tech talent magnet and the ample availability of land and the presence of good quality developers with relatively high levels of transparency and governance.
2. There is abundant dry powder (i.e. investible capital) and private equity interest for good assets in India. Blackstone, the world’s largest PE fund, for instance has more than US $584 billion in AUM (assets under management) of which their numerous Real Estate vehicles hold a collective US $174 billion. To put things in context, their total investment in India till date of US $7.8 billion accounts for <4.5% of their real estate AUM and India’s share is only expected to go up based on execution and return profiles of their various India-centric investments and platforms.
3. Debt is extremely expensive in India, even for the best developers, as compared to global coupon rates. Most developers would do well to recognize this phase as a time to clean up their balance sheets by undertaking a deleveraging program rather than continue to service high-cost debt. No one has gone broke by being debt-free!
4. REITs will without doubt be the preferred avenue of saving and investing for common Indians. Many REITs will follow, across Commercial, Warehousing and later even in alternatives such as Data Centers, Student Housing and Hospital real estate. REITs make it easy for one and all in the retail and institutional investor spectrum to participate in the CRE (Commercial Real Estate) asset class without the hassles of property maintenance or managing tenants or leases. Busy professionals like doctors, for instance, can gain exposure without worrying about hands-on property management. Pre-REIT, such benefits of healthy yields and capital appreciation accrued only to those who did the heavy-lifting of buying a physical property, rather than a buying simple financial instrument.
5. Real estate is a cyclical business and the current investment cycle has peaked. It’s time to unlock value and the emergence of Covid-19 has only accelerated the process. Many players will monetize and harvest profits and some may even begin on a new investment journey or re-start. Cities such as New York City or London have seen numerous cycles over their 200-250 year Real Estate history. Bangalore and Indian Commercial Realty have come a long way and have scored a home-run in its first Super-Cycle of 2000-2020 with many more cycles to follow as India continues on its journey to being a developed nation in the years and decades to come.

However, purely speculative builds of the amateur and fly-by-night nature will diminish, professional developers will gain an upper hand, and new winners and opportunities will continue to prevail taking Indian realty to greater heights! The writer could be reached at sa@oakap.com