The Amazing Potential Of Office REITs

CNBC TV 18 and CNBC Avast present the REIT Connect in partnership with IRA. Hello and welcome to REIT Connect, where we tell you how real estate investment trusts can become an important part of your diversified portfolio. Let me welcome on this particular show Arvind Maya, who is the CEO of Embassy REIT. Arvind, always a pleasure to speak to you. Now you're also the Indian REIT Associations head Now tell me about the journey of Reit's. It's been five years of it being in the listed space. What has been the journey like in terms of the regulatory framework and also for attracting more diversified kinds of investors? Hi Nisha, always a pleasure to speak to you. Firstly, it's been five years. It's been a phenomenal journey. I think in terms of starting off on the regulations per SE, starting with enabling the overall regulations with the regulator and then implementing it and then evolving the regulations based on what we saw in practice along with the regulators. It's been, I would say a very educational journey for all of us. But it's very important at this stage to thank a lot of regulators for bringing this product to life in India. Be it of course, starting with Sebi, IRDA, Central Board of Direct Taxes all and Department of Economic Affairs, all of them have played a significant role in bringing this product to life. But just talking about Reit's per SE, you are aware Reit's are supposed to be a stable asset class. But one year into the first REIT being in existence, we were, we got kind of existential question with COVID hitting us and then of course leading to work from home. But five years later or four years post COVID, I would say we have come out pretty strong fundamentally for two reasons. 1I office is here to stay. We can speak about this a bit more subsequently. And 2nd is because of the regulations itself. What I mean by that is if you look at the REIT regulations, firstly, it clearly says that 80% of the assets have to be completed and generating 49 percent is the maximum leverage we can take and we cannot buy land, which basically means there's no speculation. All put together, it ends up being a very stable asset class. So five years later, where are we? We are four reads, three commercial, one retail, owning about 115,000,000 square feet. We've raised about 26,000 crores from the market and distributed almost 17,000 crores in the last five years. So it's been a pretty good start for us as a product, right. But it's still at a nascent stage as an asset class here, Arvind and in other countries like in the US as well as in Singapore, they are much more evolved and matured with many types of also real estate being rolled out as Reed. How do you see India compared to the other matured markets and what could be the growth potential going forward for Reed as an asset class? Yeah, you absolutely spot on. It's, it's very early days for us. Why don't I take us as a case in point because that's probably the most evolved market for reads, right? In US, close to 99% of reads are in the form of listed commercial real estate, right? The total market capitalization for reads in US is $1.3 trillion versus that number is only around $11 billion for us in India. And when you look at the type of reach or the type of assets which are in the form of reeds, it's starting with of course commercial retail. There is a residential reach, there is hospitality in in the form of hotels, there is hospitals, there's data centers, there's industrial. So a lot of asset class was already in the form of reach. Whereas in India, Azure is just three commercial and one retail. And also just to speak a bit more on commercial, in US there is about 4.8 billion square feet of commercial real estate versus that number is only around 800 million square feet and growing pretty fast. So I would say the growth potential for this product in the country is very, very vast. And we've just started on a growth path as we speak. That's right. And you mentioned about the various types of real estate also being part of it. But in India we have one in which owns shopping malls and the rest, the bulk of it really comes from office space. S Let's talk about the potential, Arvind. What's the potential of this great A office complexes and in terms of growth in terms of demand as well as also the rentals increasing, which has a direct benefit for the investors of Reed? Yeah. So talking about office, Nisha, we the three commercial office reach today own around 100 million square feet versus the All India stock as I said is around 800 million square feet. But just to start with a few numbers first over the last, if you see calendar year 23, you've done about 60 million square feet of gross absorption around 40 million net. The number is expected to be around 65,000,000 square feet for calendar year 24. And largely this is coming from unprecedented demand from global captives, right? So they're growing phenomenally in India. Again, to give you a few numbers on captives today, there's around 1700 captives in India, expected to grow to around 2500. They employ around 19,00,000 people, expected again to grow to around 45,00,000 people. And the interesting status, close to 72% of global 500 companies as of today still don't have a captive presence in India. So all of these are coming to India. So the question is why is commercial office growing in India? I would say broadly 3 reasons #1 the most fundamental being availability of talent at scale and at a reasonable cost. Now if you want skill sets, you know, you know people across different skill sets, you'll find it in India and at the scale which organizations want. So that's number one. Number two I would say is availability of world class office space in India like what you find globally. And probably the third important reason is the India is a country per SE, right? We are seeing a phenomenal amount of growth as a country, stability in policy, lot of investments in infrastructure and of course the focus on ease of doing business all put together. I think these are, I would say the catalyst for commercial office to grow, continue to grow in India. So Arvind, there's a lot of interest by the global investors as well as global, you know, companies to step into India and that's where a large part of demand could come in and that could also escalate the rentals and the kind of money generated by Reed's. But my final question and answer to that, you know, you spoke about the business aspect which has a direct correlation to the benefit to the investors because you have to mandatorily distribute your cash that is generated by the company. So that goes as the the the fixed income part of this particular product. But the equity upside because it's a listed entity is one thing that is dependent on more traction and popularity of this particular product. Very quickly, how do you see that growth? Yeah, so to be frank, Nisha reach today, I mean the investors in retail, the retail investors is very, very small. I mean as a country, we are 140 crore people, population close to 15,00,00,000 DMAT holders, but just two lakh retail investors across the four reach. That's like .1% of the 15,00,00,000 as we speak, again, drawing reference to US, of the 35,00,00,000 population in the country, close to 50% have exposure to reach directly or indirectly. So you can see the potential available in terms of this product. Having said that, I would say there are two things which we need to do to ensure that this investor base increases #1 which is purely dependent on us. The existing reach as well as the new reach is to ensure we continue to deliver stable returns as well as grow the returns over a period of time, which is what you said. And second, more important thing is building awareness. This is exactly what we are doing through programs like this, enhancing investor awareness of what this means. And of course, we have a nice benchmark in the form of what MP did for mutual funds. This is exactly what we are trying to do in the form of Indian REIT Association doing more and more awareness programs to ensure that we tap into the vast, vast population of this country so that they're able to subscribe to this product. All right, thanks so much, Arvind Maya for explaining to us and our viewers about the potential of Reeds as an asset class. Thank you so much for joining us. With that. Its a wrap on this edition of Reed Connect. Thanks so much for tuning into this. CNBC TV 18 and CNBC Avast present the Reed Connect in partnership with IRA.