Vikaash Khdloya, Deputy Chief Executive Officer and COO, Embassy REIT, who takes over as CEO on July 1, tells Vandana Ramnani that Embassy REIT has leased 2.2 million sq ft (msf) of space and achieved 14 percent rent escalations on 7.7 msf across 89 deals in the last quarter. A Harvard Business School graduate, Khdloya is bullish that the trend will continue with more employees returning to work and companies now better prepared to handle a fourth wave of COVID-19 in case it strikes. Edited excerpts:
Is the demand for office space looking up with employees returning to work?
We have seen a clear trend of employees coming back to work. The physical occupancy in our parks is about 20 percent and about 55,000 people are back at work. Interestingly, in cities like Mumbai, we are already seeing more than 50 percent park population back to work. Demand is likely to rebound strongly this year and next year, given the fact that the core customer base, which includes global captives, such as large banks, financial services companies, and technology companies, are seeing record offshoring business to India. The hiring that we have all seen is getting translated into demand for office space. We are positive on the demand outlook as we move forward. Bengaluru continues to lead India’s office recovery but we are seeing early green shoots in the rest of the portfolio cities as well.
In 2021-22, the company signed 2.2 million msf of lease deals, including fresh leases and lease renewals, across 47 deals. What percentage of this comprises new leases and renewals? Is demand for office space now driven by your existing tenants or are you witnessing demand from companies from other sectors?
Last year, we did about 2.2 msf of total leases across 40 deals. Interestingly, this was the same level of activity in terms of the number of deals that we saw pre-COVID. As a strategy, we have focused on the new high-growth occupiers and the average size of the lease was around 50,000 sq ft, which is lower than the average. The idea was to capture the future potential from these occupiers as they continue to grow. We are focused on the smaller leases and high growth occupiers. Having said that, we have seen demand from sectors starting from global captives to the large product tech companies to the traditional IT services companies. Also, we have seen demand from a new set of occupiers like makers of electric vehicles, SaaS services, software services, and e-commerce players. As we move forward, we have a very strong pipeline of about 500,000 sq ft and we have given a leasing guidance of 5 msf for FY 2023.
If we compare it with what we did in FY 2022, our target for the coming year has more than doubled. Last year, we did about 2.2 msf.
In terms of existing as well as old occupiers, we see a healthy mix of both. The existing occupiers continue to come back to us, and since it is an existing relationship, the turnaround is much faster. We also see demand from new occupiers. Last year, we added quite a few new names in our tenant roster.
Have any unicorns expressed interest in office space take-up?
We continue to have conversations with both existing (occupiers) and others on the new leased spaces. As a philosophy we provide occupiers a total business ecosystem, whether it be health, safety, wellness for employees, green areas, amphi theatres, or food courts. The main challenges global occupiers and unicorns are facing today are hiring, and retaining the best talent. We see our role as business partner to these global and Indian companies in how we can, as landlords, provide them an ecosystem and a workplace which helps them attract and retain talent -- that is the core of our philosophy, and that is the reason why our portfolio has been resilient despite Covid-19.
We have distributed over Rs 2,000 crore in FY2022 and have had a resilient performance. We have seen new lease deals at the same number as we saw pre-COVID. Our Net Operating Income grew by 23 percent last year. The reason is that we cater to these high-quality occupiers -- whether it be a large international bank or a unicorn. If we can provide them a space that helps them to retain and continue to attract talent as they grow, we become national business partners to them and that helps in our growth journey as well.
Have rentals been constant?
We have not given any rental discounts or waivers to our occupiers throughout the COVID period. We continued to collect 100 percent of our rent throughout the 2.5-year-period during which we were in the shadow of the pandemic. We have also collected all our contractual leases. If you recollect, the rents increased by roughly 15 percent every three years. We successfully continue to collect 100 percent of those escalations as well.
Taking a step back, we have been resilient because these occupiers are not in India as the rents are cheap, in India rents are just about $1 per sq ft per month. This is very low compared to global standards. These occupiers are in India to access talent. India has one of the best talent pools which is very well recognised now, the STEM talent pool, and India can provide these global and Indian companies the scale of operations in terms of people, and in terms of productivity. That is why these companies are in India. Logically, following that, what these companies need to do is to participate or partner with the landlords who can help them attract and retain talent. The labour cost in India is 25-30 percent of what it could be globally in markets such as the US.
The rent in terms of the proportion of the overall cost pay is about 4-6 percent. Rents are a very small part of the overall cost. At Embassy REIT, our strategy has been to cater to the requirements of the high quality of the growth occupiers, and if we can do that, then the rental growth that you mentioned is just a by-product. We have continued to see rents being resilient despite the first and second lockdowns, and despite a number of landlords facing pressure on rentals. In the last two quarters, we saw early green shoots of demand. We have seen rents starting to inch up, especially in markets like Bengaluru and Mumbai. We expect a similar trend in Pune, Hyderabad, and NCR.
We see rents starting to inch up, as people get back to work, as the physical occupancy of parks improve. And when that happens, then occupiers will start committing to spaces. Mind you, they have not taken a real estate decision on leasing new space over the last two to 2.5 years, and there is a lot of pent-up demand. As the pent-up demand translates into LOIs, into lease contract signings, that would mean that the supply gets absorbed into the market and the rents start inching up. In Bengaluru, over the last two quarters, we have seen rents inching up between 4-6 percent on an annual basis.
How well is the company prepared for a fourth wave COVID-19? Will that impact leasing targets and revenue from rentals?Both the occupiers and the industry have been through a couple of COVID-19 waves so far. Overall, I would say that everybody is far better prepared to deal with any next wave that were to come up. Obviously, there have been very encouraging trends on the vaccination front across segments and that helps. Everybody is much better prepared and we have seen that recovery has been much faster in every subsequent COVID wave. In our view, barring any extreme contingency or extreme variant, which cannot be managed or controlled by the existing vaccines that are available, we do not see that as having any major impact on occupier plans. Business leaders have publicly stated that the physical office has to be the core of the workplace and that they want a significant chunk of the employees back to work, as teamwork, collaboration, and culture are important for them to set the trend.