Embassy Office Parks REIT has revised its leasing guidance upwards from 6 million sq ft to 6.5 million sq ft for FY24 despite the headwinds in Western economies. In an interview, CEO Aravind Maiya tells Raghavendra Kamath about the plans and outlook for the office sector.
What made you upgrade leasing guidance for the year?
We have had a strong first half with 3.1 million sq ft of total leases, which include a 0.6-million-sq-ft renewal with a leading global tech firm at our Embassy Golf Links office in Bangalore. In addition, the outlook for the full year looks promising, bolstered by the record leasing pipeline of 2.5 million sq ft. Encouraged by these positive trends, including the ever-increasing demand from GCCs (global captive centres), we致e revised our leasing guidance upwards.
Demand from GCCs accounted for over 70% of total leasing activity. What is your outlook from this segment in coming quarters?
GCCs continue to drive the overall demand as multinational companies continue to invest in Indian talent, and in turn, in India offices. If you look at the statistics, they speak for themselves ~45% of pan-India痴 Q2 demand (Knight Frank report), ~60% of our overall portfolio, and 70% of our total leasing activity this quarter were driven by GCCs. According to industry reports, 42 new GCCs were set up in the first half of this year and 115 new centres are expected to be set up every year until 2030, creating 2.6 million new jobs in the country. This demonstrates the growing demand for offshoring solutions in the country, and we expect this trend to grow multiple folds in the coming quarters.
Embassy REIT is developing 7.1 million sq ft of office space, and you would need Rs 4,000 crore. How do you plan to finance it?
We finance all our organic growth through debt. Development is one of the key growth levers of our business and the pipeline of 7.1 million sq ft is expected to add over Rs 800 crore to our NOI upon stabilisation at an attractive 20% yield. Our AAA/stable-rated strong balance sheet, with the lowest average cost of debt in the industry at 7.4%, and ample debt headroom, position us well to finance growth initiatives.
In the September quarter, your same-store occupancy declined by 200 bps QoQ to 85%. Do you expect the occupancy at the Embassy REIT properties to improve in the coming quarters?
We致e guided for an 85% occupancy by for our full portfolio, including upcoming deliveries of 1.1 msf in H2FY24, and an 88% occupancy on a same-store basis by March 2024. Our two largest markets Bangalore and Mumbai are doing well. Mumbai is at 96% occupancy with our Embassy 247 office being 100% occupied. Bangalore assets are around 90% with Embassy Tech Village and Embassy Golf Links at 97% occupancy levels.
You take on continued hybrid work and a sharp downturn in IT firms affecting the business.
Hybrid work models have become an established part of the working landscape. The degree of flexibility varies depending on the type of the firm. For example, front office functions have returned to pre-Covid levels and are operating at full return to office (RTO) capacity. Most GCCs have employees attending offices at least thrice a week, with their occupancy levels ranging from 60% to 75%. Only ITeS firms have had a slower RTO, with occupancy levels still being in the range of 30-40%. While there should be a pick-up in the IT space in due course, the rampant growth in GCCs across different sectors is making up for the slowdown.
Analysts say rents will remain flat till FY25. How do you look at it?
Rents have started to grow across top cities. According to industry reports, Mumbai has grown by about 3% and Bangalore by around 5%. If you look at our portfolio, we generally lease above market rents given our total business ecosystem offering and the high quality of our office parks. For example, in one of our largest properties, Embassy Manyata in Bangalore, we致e been able to increase our in-place rentals by 25% in the last 18 months.
