Embassy Office Parks REIT leased 1.1 million sq ft office space in Q1 FY24 and has guided for 6 million sq ft for the full year. Aravind Maiya, who took over as chief executive officer at Embassy REITin April , discusses with Raghavendra Kamath the impact of a slowdown in the US on the company’s operations and outlook for office properties.
You have guided for a record 6 million sq ft. What is giving you the confidence when US and other markets are struggling?
The India office story is very different from the West. We are seeing sustained leasing activity in India despite a global office slowdown, as global captives continue to set up and expand their offshoring centres, leveraging on India’s skilled talent pool and the associated cost arbitrage. Last year, we leased 5.1 million sq ft, and in Q1FY24 we leased 1.1 million sq ft and achieved a 9% growth in NOI (net operating income). In addition, we have a strong pipeline of 2 million sq ft comprised mainly of global captive centres (GCCs). Bengaluru, our core market, contributed ~75% of our Q1 leasing. The city also continues to attract GCCs; of the 66 new GCCs setup last year, half of them were in Bengaluru. All of this taken together — a strong Q1 performance, healthy pipeline and interest rate stabilisation — sets the foundation for our guidance.
You leased 1.1 million sq ft in Q1. Could you give us a break-up of the industry -wise leasing?
The leasing demand was primarily driven by GCCs, contributing to over 71% of our total leasing. In terms of sectors, besides technology occupiers, BFSI, consulting, engineering and manufacturing firms led the demand.
How is the demand for space from IT firms. How do you look at the demand from them in the remainder of FY24?
GCCs across sectors are the principal drivers of demand compared to Indian IT firms, and we expect that trend to intensify for the remainder of the year. India is home to 45% of the world’s GCCs and 115 are expected to be set up every year this decade. IT/ITeS businesses have had a lower BTO ( back to office) and their recent cautionary commentary on their revenue growth indicate a slower pick-up. However, these IT firms have made significant hiring over the last three years. This, combined with the overall commentary from IT leaders on BTO, should translate to increased space take up in due course.
What is your outlook on rentals in FY24?
We have started to see rental growth in key micro markets of Bengaluru and Mumbai.We usually lease at higher than market rents given the quality of our office spaces.
Do you have debt raising plans this quarter and do you expect to raise debt at lower rates?
Our credit is the best in the industry; our current `15000 crore debt book is roughly at 7.28%. This past quarter, we raised `2,075 crore at an average rate of 7.8% and achieved a 120 bps spread over G-Sec, our lowest ever. We have `4,100 crore of non-convertible debentures (NCDs) due for refinancing later this year. We are always monitoring the capital markets to ensure we have the right window to raise debt and we are confident of doing so at the best possible terms.
Why are REIT share prices subdued since beginning of the year?
(There are) multiple factors that aren’t linked to India office fundamentals, but two main reasons. One, negative sentiment around global offices (US office REITs have traded down 25% in total return terms over the last 12 months) and second an interest rate environment that continues to cloud the broader financing picture. We are confident that Indian REITs will re-rate once the volatility subsides, because the fundamentals of Indian office, due to demand for Indian talent remains very much intact.
With 26% of the leases expiring between 2024-2027, do you foresee any impact on renewals/releasing of this space given the global headwinds?
Lease expiries are normal, business as usual for us and constitute less than 10% of rents expiring in each year. In the last three years, 3.6 million sq ft of renewals were done at 14% renewal spreads and re-leasing of 2.9 million sq ft was at 20% re-leasing spread.For example, at Embassy Manyata, one of our flagship assets in Bengaluru, these expiries have played out favourably for us. We have seen a churn from IT to GCCs and a rental increase of around 20% in the last 18 months. Our occupancy has also gone up to 91% in this property. We remain confident that these global headwinds will abate post the interest rate hike pause and India / Indian office stands to benefit from structural tailwinds.