MUMBAI—A venture including private-equity giant Blackstone Group LP is poised to launch India’s first real estate investment trust in an initial public offering that could raise more than $600 million and mark a milestone in the development of a modern commercial real estate industry in India.
For Blackstone, the deal would do a lot more than simply make history. It would also enable the world’s largest private real estate owner to start cashing in on a contrarian bet that it made on India after some foreign investors had exited from the country.
Like many foreign investors, Blackstone showed up in India about a decade ago shortly after the country had loosened rules governing foreign investment in real estate. But Blackstone didn’t acquire its first property until 2011, after others had plunged in and gotten burned by a range of problems, including inflated values and fights with domestic partners.
Since then, Blackstone has gone on a buying spree amassing close to 30 million square feet of space to become one of the country’s largest office landlords. Meanwhile, the office market has steadily strengthened with rents, occupancies and values rising.
Now the firm is moving to take some of its profits off the table by taking advantage of new regulations that allow property portfolios to be structured as real estate investment trusts, or REITs. The structure, which originated in the U.S. a half-century ago, has become popular in more countries because REITs’ tax burden is much lower than other companies and they tend to pay higher dividends.
India considered allowing REITs for years but the structure didn’t get final regulatory approvals until after Prime MinisterNarendra Modi took power in 2014. So far, though, there have been no REIT listings.
Embassy Group, Blackstone’s partner on a large part of its portfolio —more than 20 million square feet valued at more than $2 billion—has filed a REIT application with the Securities and Exchange Board of India. The REIT, which is likely to include property co-owned by Blackstone, could raise between 40 billion rupees and 45 billion rupees ($588 million to $662 million), according to people familiar with the matter.
Executives at Blackstone declined to comment on the plan. An Embassy spokesman said the company evaluates various capital-raising options, and one such option is to “consider a listing of select assets through the real estate investment trust route.”
But Blackstone executives say in general that the firm’s overall strategy in India appears to be paying off. The firm has mostly purchased and invested in building big Western-style office parks with multinational companies as tenants, including International Business Machines Corp., Microsoft Corp. and Goldman Sachs GroupInc.
When Blackstone started investing, prices were so low that their initial yields from properties’ incomes—which are known as capitalization rates in the real estate business—were above 10%. Today cap rates are in the 8% range—a sign that prices have risen.
Blackstone has been providing “world class space…at a fraction of what it would cost to provide the same environment elsewhere in the world,” said Christopher Heady, Blackstone’s head of real estate in Asia.
To be sure, the success of the planned IPO is by no means assured. Foreign investors have been bearish on Indian stocks in recent weeks—withdrawing $2.7 billion in November—as part of a broader pullback from emerging markets.
This year, India’s IPO market has been strong, allowing companies to raise more money than they have been able to in the past few years. But Mr. Modi’s recent move to cancel India’s highest-denomination rupee notes has destabilized the property market, hurting values.
“I think people are going to take a step back and watch a little bit,” said Matthew Cypher, director of the Steers Center for Global Real Estate at Georgetown University.
Other developers are also looking to launch REITs in the coming months. North India-based developer DLF Ltd. “would consider filing a REIT at an appropriate date,” a spokesman for the real estate firm said. South India-based developer RMZ Corp. has also said it would consider filing a REIT.
Other foreign investors who may launch a REIT in the future include Brookfield Asset Management Inc., according to people familiar with the matter.
In recent years, timing has been favorable to Blackstone. Leasing volume in the country jumped from 26 million square feet in 2012 to a record high of 39 million square feet in 2015, according to CBRE Group Inc. Vacancy fell to 17% from 22% during this period.
Demand is “driven by India’s strong economic growth, stable political environment and the country’s sustained positioning as the leading outsourcing destination in the world,” said Anshuman Magazine, chairman of CBRE in India and South East Asia.
Embassy is also partnering with WeWork Cos. in WeWork’s expansion into India’s co-working space business. Blackstone isn’t involved in that effort.
Author: Shefali Anand with contributions from Peter Grant.
Credits Wall Street Journal