Vinod Rohira, CEO, Mindspace Business Parks REIT, in an exclusive interview with Moneycontrol's Vandana Ramnani talks about the outlook of the commercial real estate market and real estate investment trusts (REITs).
What is the opportunity for commercial real estate and Grade A office space providers in the context of India’s evolving technology landscape?
India has delivered as the technology backbone for support services, through the pandemic, and the last 12 months have seen tremendous growth. This reliance, driven by growth in employment in the tech footprint, has positioned India right at the forefront of becoming the tech hub for the world. Additionally, today’s talent seeks greater quality of workspaces post the pandemic, which is leading to demand for Grade A assets for commercial use, leading to high demand growth.
What are your comments on the results ended September 30, 2021?
We continue to witness strong leasing activity across our portfolio with over 2.1 million square feet (msf) leased in the first half of this financial year. We remain increasingly confident of the commercial market outlook, buoyed by record tech hiring and growth trends, improved GCC prospects, vaccination coverage in our gateway cities as employees return to office. We are excited about the robust demand cycle re-emerging.
Does the progress on the vaccination rollout and resumption of employees’ return to offices bode well for office leasing demand? You had said last year that office leasing is expected to see growth in the next four to five quarters. Is this coming true post the second wave of COVID-19?
India’s delivery to tech companies, coupled with the aggressive rollout of the vaccination programme by the government, has led to a substantial shift in people’s mind-set from ‘work from home’ towards ‘work from office’.
Technology companies in India have also renewed their hiring on the back of business growth, which is further leading to a renewed demand for Grade A office spaces that are built with compliance, governance, health and safety protocols. Beginning with the first quarter of calendar year 2022, we will see a significant return of physical occupancy at the workplace. This, coupled with the growth witnessed especially by tech companies, will lead to a demand surge in the subsequent quarters.
A report by Edelweiss has said that large upcoming supply is likely to keep vacancies high and rents under pressure in the near term. Leasing activity picked up with vaccination gaining pace and the economy opening up. But demand in the nine months of calendar year 2021 is at 11.5 msf, which is down 14% year-on-year, indicating the pandemic’s adverse impact. Do you agree with this? Also, has delay in completion of new projects affected the commercial real estate market?
Grade A supply is shrinking and the expected supply at a market level has been pushed ahead due to the lockdown-related disruptions and availability of liquidity with only a few players. While the cost of debt has come down across the board, very little finance is available to developers for creating speculative supply. Even out of this expected supply, the comparable Grade A supply is low, and new supply as earlier envisaged is not materializing.
Only well-capitalised institutional players are able to get finance and if you add up the supply declared by these players, the overall supply is lower than the anticipated demand. Furthermore, with the demand in residential segments also picking up after the pandemic, developers who were planning to convert their projects from residential to commercial are now rolling back their plans and deciding to continue with residential projects. Consequently, a certain portion of this hyped supply is now permanently shelved.
What about foreign investments into commercial real estate? Has it hit the pause button post with two waves of the pandemic? What type of assets are institutional investors currently looking at?
Investments in commercial real estate have continued unabated even after the pandemic. In India, the demand for Grade A spaces in top cities is likely to grow due to the strong demand from the services sector and on account of vast availability of STEM (science, technology, engineering and mathematics) talent. Investors are still bullish and continue to deploy fresh funds in the sector. They continue to see India as a strong investment opportunity.
Do you foresee further consolidation in the commercial office sector?
We saw significant consolidation and will continue to see consolidation in this sector with large institutional buyouts of Grade A developments in the last 12-18 months.
How have REITs transformed the commercial realty sector? What more changes are required on the policy front?
Globally, all stabilised markets operate through REITs for commercial real estate. In India, REITs are still at a nascent stage but poised to evolve as a strong asset class for alternative investments. The Indian legislation on REITs is very forward-looking and safeguards investors, while building the REIT space within the right framework.
Earlier, due to the high ticket size of transactions, investors were restricted to high net-worth individuals and large financial institutions. The recent amendments by SEBI (Securities and Exchange Board of India) to revise the minimum subscription and trading lot for publicly issued REITs has further helped this cause. Both these amendments have enabled a wider retail investor participation in the units of REIT, thereby leading to enhanced liquidity for the instrument.
What are Mindspace REIT’s future plans? What are the yields that you are targeting this year? Do you plan to acquire more assets? Which markets are you planning to expand into—south or north? Are you planning to take over existing buildings and retrofit them into Grade A office spaces?
We are completing under-construction assets within the portfolio and will begin new construction of projects within the portfolio, backed by renewed demand.
On the organic side, we expect to add approximately 1.8 msf of area to our completed portfolio in the next financial year which comprises two under-construction buildings at Mindspace Airoli West, Mumbai region, and Gera Commerzone, Kharadi, Pune. We will also infuse the ROFO (right of first offer) opportunities within the REIT. We have a ROFO pipeline of 8.6 msf across Mumbai region, Hyderabad and Chennai. In addition, we continue to evaluate various inorganic opportunities which are value accretive and match the DNA of the portfolio.
What is the future of buildings and the potential of a green transition in the built environment?
At Mindspace Business Parks REIT, we have always been at the forefront of sustainability. It is not something we do opportunistically but is the core DNA of the entity. We endeavour to create a far greener environment and bring in interventions on each ESG (environmental, social and governance) goal we have. In fact, we are the first real estate entity from India to commit to the Climate Group’s RE100 initiative.
We have also committed to transform to 100% renewable energy use across all areas serviced and maintained within the REIT portfolio. Under the (Climate Group’s) EV100 initiative, the entire vehicular fleet used at the parks will transform to electric vehicles in a phased manner. We have already installed over 950 EV charging points across the parks.
What are some of the emerging trends as the workforces of many companies return to office after a long break?
With a large part of the urban population double vaccinated, it is a welcome sight to see airports, retail stores, food-courts, cinemas, and cricket stadiums with people. With normalcy returning, there is a natural progression towards working from office.While domestic India is back at the workplace, the tech talent is still getting back to work and we expect to see them ramp up the occupancy physically within the next few quarters. Today, there is far greater focus on recreation, open spaces, entertainment opportunities, collaborative spaces, as the new office environment emerges, but with a reduction in the density of occupancy.