Blackstone Real Estate is the largest office space owner in India with a commercial real estate portfolio valued at $20 billion. Kenneth Caplan, global co-head of Blackstone Real Estate, and Tuhin Parikh, head of real estate at Blackstone India, told Nisha Poddar that they are bullish on India investments and see an all around recovery in office rentals, malls and logistics to pre-COVID levels. Excerpts from an exclusive conversation.
How are the macros stacking up in real estate space and from Blackstone’s point of view, how are real estate investments looking at this point? Caplan: From a macro standpoint, we are in this uncertain time, with a more challenging environment, and we have COVID still creating disruptions. We have geopolitical conflicts happening, with rising inflation and rising interest rates and that is creating a more challenging backdrop and challenging environment.
In terms of what is driving that, we have demand that is increasing. I am based in New York and in the US we are seeing economy reopening, a tight job market, a lot of fiscal stimulus that is stimulating a lot more demand than supply can keep up with and that’s triggering inflation.
With higher inflation we are seeing higher interest rates and with higher interest rates we are seeing the US Fed trying to tamp that down and that’s creating an environment where people are questioning how much of that tightening do you have and what does that mean for growth.
Generally we are seeing slowing growth in parts of the US, slowing growth in parts of Europe obviously again with the Ukraine situation and slowing growth in other parts of the world as well, but here in India we are seeing greater growth. You are seeing higher inflation and some higher interest rates but you are also seeing higher level of growth which is actually really encouraging and positive.
Tuhin, here in India you are the largest owner of office space, how is that shaping up at the moment given the new change in the macro environment. Being a $20 billion portfolio manager, what are you looking at?
Tuhin Parikh: As Kenneth mentioned we are highly thematic investors, so we invest in what are long-term trends -- so in office, the trend that we are investing in is the fact that the growth of the ITs and offshoring business outsourcing in India has accelerated during Covid.
We had work from home issues but hiring places doubled in India in the past couple of years -- that’s an extremely good underpinning of the fundamentals or office business and we are seeing that now as people are coming back to office, demand for offices is actually quite strong and we are seeing that recovery across the entire portfolio in office; retail world recovery has been the strongest so far.
People are going out to shop, to consume, to see movies, malls are performing much better than they were at their 2019 peak. Newest portfolio, of which we are the largest owners, warehousing, where the e-commerce tailwinds and GST uniformalisation of the Indian economy are really propelling new tenants to come in and take up space.
Now there’s a hybrid model but the vacancies it seems have been dropping, so how are the rental prices stacking up
Parikh: When Covid hit obviously, the world came to a standstill -- people didn’t know what was happening at that point in time. There was a high level of uncertainty, whether people would come back to office or what would happen.
I think two trends have come out, people may want more flexibility in their work-life, the fact that office is a centre of your work-life has also become a reality -- office being a part of people’s lives is not going away.
Given rental pressures, inflation is increasing the cost of producing the same assets and the interest rate is reducing the amount of development people can do, therefore we actually see rentals firming in India because replacement costs are going up. The same office building takes 20-30 percent more to develop than it took 2-3 years ago, that’s pretty good fundamentals for existing stuff that we own.
Which are the new areas you are focusing on for more investment?
Caplan: Hotels are an area we have been investing in since the beginning of our existence, we have been investing in real estate for 30 years. It is what we have done from the beginning, we actually have a number of hotel investments here in India -- it is an area we are globally very enthusiastic about and that would include India.
Data centres as well, frankly. In data centres we bought a company called QTS in the US last year and it had great initial success, not only the portfolio but also growing that business and we look for similar opportunities here in India. And we are studying other areas to grow as well. Those are two good examples and again that’s partly why I am here and we are constantly looking at where are those opportunities, where are those strong tailwinds. The good neighbourhoods are where we wanna invest.
How is India placed when it comes to ESG (environmental, social, and governance) compliance especially in portfolio companies?
Parikh: I think in India we are quite high on the ESG compliance plus it is good business for us. As convention we have 175 megawatt of solar parks, which we have built ourselves to provide green energy to our tenants. We are pretty focused on reduction of energy consumption. We have worked very hard with many of our communities. One example is we have worked with government schools in Bengaluru. In Bengaluru we have built a flyover outside one of our parks to improve traffic congestion, we have paid for skywalks to ensure that people can safely cross roads and we are building a metro station so we do a bunch of things around communities, besides reducing energy consumption being the other lynchpin of the ESG business.
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