Biggest REIT issue in the offing? Blackstone-Embassy JV scaled up to $3 bn

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Updated: April 22, 2016 5:40:31 PM

US-based private equity (PE) firm Blackstone and the Embassy Group have reworked their real estate investment trust (REIT) issue to $3 billion from the initial $2 billion planned, sources close to the development told FE.

Blackstone - Embassy dealUS-based private equity (PE) firm Blackstone and the Embassy Group have reworked their real estate investment trust (REIT) issue to billion from the initial billion planned. (Reuters photo)

US-based private equity (PE) firm Blackstone and the Embassy Group have reworked their real estate investment trust (REIT) issue to $3 billion from the initial $2 billion planned, sources close to the development told FE. The Bengaluru-based Embassy Group confirmed the issue will be bigger than earlier proposed though it did not confirm the exact size. The REIT will house close to 40 million square feet of property that Embassy and Blackstone have accumulated between them — this was earlier pegged at 27 million square feet. Embassy Office Parks, the joint venture between Blackstone and Embassy, now owns the largest commercial asset portfolio in the country, surpassing that of DLF. Morgan Stanley and Goldman Sachs are understood to have been appointed as managers to the issue.

Industry experts said that the majority of the assets will command a capitalisation rate between 8% and 9%, making these significantly valuable in the current market. Neeraj Sharma, partner at Walker Chandiok, said the REIT will enjoy high credibility given Blackstone owns quality assets and has a good reputation.

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Embassy is understood to have a stake in approximately 75% of the assets while Blackstone owns the rest. The PE major announced some time ago that almost 53% of its total investments in India are in the real estate sector. The fund’s strategy has been to buy commercial real estate at distressed valuations, creating room for significant returns.

Most projects pooled in the REIT will be located in Bengaluru, the top destination for commercial assets thanks to demand from the IT and ITeS sectors. Among these is Embassy Tech Village, where Flipkart had signed an annual lease agreement for R300 crore back in 2014, making it the most expensive leasing deal. Other properties include Embassy Tech Zone in Pune, and Manyata Business Park and Embassy Golf Links in Bengaluru. According to Embassy’s website, the firm lists IBM, Goldman Sachs, Hexaware, Yahoo and Wells Fargo as its clients. Other than Bengaluru, the REIT will have a pool of of Grade A developments in marquee office districts in Pune and Mumbai, and in Noida.

Last year Bengaluru saw absorption peak at over 8 million sq ft. According to a commercial report published by CBRE last week, IT corridors in the city have seen rentals rise sharply.

Moreover, prices have appreciated in Pune while rentals in top quality buildings in Mumbai and Pune have been stable.

While both players are readying for a REIT, it is unlikely to hit the market before late 2016. Anish Sanghvi, partner at PwC, said that although the rules are in place, the companies will take time to work out an optimum capital structure and hold road shows.

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