Embassy REIT has delivered 50% total returns since listing: Vikaash Khdloya

"Our overall philosophy on co-working has been that it is an amenity for our business parks and occupiers", said Khdloya

Embassy Office Parks REIT leased 1.8 million square feet across 25 transactions. This includes a 550,000 sq ft pre-commitment from JP Morgan at Embassy Tech Village in Bengaluru, during the April-June quarter of FY23. The REIT said the April-June period was its best quarter since 2016. Vikaash Khdloya, who in April took over as chief executive officer (CEO) of the REIT, discusses his outlook for the segment and impact of hybrid space models in an interview with Raghavendra Kamath.

Even as the pandemic fades, hybrid working prevails. How has this new trend impacted the vacancy and rentals in your office parks?

As the pandemic fades, Indian office leasing is on a very positive growth trajectory backed by record tech spends and increased offshoring to India from global corporations. As a result, we have achieved a record 1.8 million square feet of total leasing last quarter, our highest over the last seven years. Furthermore, in the current rising interest rate and cost inflation environment, upcoming market supply is likely to get impacted, except for large, well-funded players like us. While vacancies across office markets in India were impacted during the pandemic, we saw that rents largely held stable. As leasing activity ramps up, driven by accelerated decision making by corporates, we expect a reduction in vacancies, especially for high-quality properties in key micro markets. This will eventually lead to rental growth and Bengaluru is already witnessing the first signs of this trend.

Co-working spaces have picked up big-time. What percentage of total corporate occupancy in your office parks is from co-working operators?

Our overall philosophy on co-working has been that it is an amenity for our business parks and occupiers. It helps our overall total business ecosystem offering. Our strategy is to engage high-growth occupiers early on, so that they can grow with us. Co-working spaces in our parks help in this endeavour. They allow nascent businesses to latch onto the available talent pool at limited upfront capex; As they scale up in due course and establish business viability, we see them expand out of the co-working spaces. They opt for our standard landlord-occupier relationship within the same property. We are seeing new tenants taking up 100-150 seats with co-working players but planning to expand in the future. Across India, co-working accounts for less than five per cent of the available office space. Our portfolio exposure is in line with this in low-single percentage points.

What is your outlook for rents in FY23 and FY24? How much supply do you expect from Embassy REIT in the next three years?

Rents have largely held stable across the pandemic, especially for Grade A portfolios like ours. However, we are seeing signs of an uptick in some of our key micro markets with lower vacancies, especially Bengaluru. Recently, CBRE reported rental increase of 1-5 per cent QoQ across multiple micro-markets in Bengaluru. Regarding our upcoming supply, we have accelerated development of 4.6 million sq ft on-campus office projects. These are expected to be delivered in phases over the next three years. Over 70 per cent of this development is in Bengaluru, which continues to see the highest office absorption levels pan-Indian.

Any city where you expect challenges in terms of leasing or vacancy in FY23?

Our occupancy has remained stable at 87 per cent this quarter and has continued to be resilient despite being in the shadow of the pandemic for two years. This is due to the high quality of our portfolio in the best locations, as well as the underlying covenants of our marquee occupier base. Even though more supply is expected as Covid normalises, we are comfortable with the demand-supply balance in most of our micro markets. Given our concentration in the right market and right customer base, we expect our occupancy to reach levels of the mid-nineties in the medium term. With Bengaluru leading the office recovery and Mumbai a close second, we expect our other two markets, Pune and NCR (National Capital Region) to benefit from this back-to-office trend. The year 2019 was the peak for commercial real estate demand in India, with gross absorption reaching 60 million sq ft for the entire year. According to CBRE, the office sector recorded its all-time high gross absorption of 18.2 million sq ft this quarter, and 28 million sq ft in H1 of CY22.

The stock markets have been extremely volatile recently. Amid this, what has been the investors’ interest in REITs?

Amid the market choppiness, REITs provide a solid investment avenue — that is low-volatility, risk-adjusted and balanced total returns. The underlying investment class on our listed REIT is primarily commercial real estate in gateway cities, which is inherently stable and acts as an inflation-hedge of sorts. Despite the pandemic, Embassy REIT has delivered 50 per cent total returns since listing three years ago.

With massive layoffs in start-ups, what will be the impact on the office sector?

Our exposure to start-ups has always been minimal, primarily through co-working (less than three per cent). As a strategy, we are focused on bringing in new high-growth occupiers, many of whom are setting up their first offices in India.

What are your plans to look beyond Bengaluru for office spaces? Which cities interest you in particular?

Our over 70 per cent concentration in Bangalore is a key strength for us. Bangalore continues to lead India's office recovery, accounting for more than 60 per cent of new lease enquiries and a dominant one third of actual demand absorption this quarter. Bangalore has developed an unparalleled talent catchment thanks to an established ecosystem of global captives and technology players. Besides Bangalore, we are also present in three other gateway cities of India – Mumbai, Pune, and NCR. Further, as per our acquisition strategy, we continue to look for world class, large-scale business parks located in the right micro-markets of the top 6 Indian cities – so Chennai and Hyderabad additionally, besides our current cities.