Optimistic about recovery of the Indian office leasing market, Embassy Office Parks REIT’s chief executive officer, Michael Holland feels the firm’s resilient performance puts it on the drivers seat as companies look to bring employees back in numbers by October-December 2021. Speaking with FE’s Rishi Ranjan Kala, Holland noted that Embassy REIT has paid distributions to unit holders for the 9th consecutive quarter since listing and aims to increase them by 11% Y-o-Y in FY22. Excerpts:
How has Embassy REIT’s performance been in Q1 FY22?
We have seen great growth. We are distributing again, and distributions are a key part of our proposition. I think this is the ninth quarter since listing and we are paying Rs 536 crore in distributions in Q1 FY22. That brings us to a place where we paid out Rs 2,250 crore since listing. We are happy, particularly given the fact that last quarter was under restrictions, but the strength of Indian office, REIT and business is intact.
However metrics like weighted average lease expiry (WALE) are down. Are these an indicator of times ahead?
We think we are close to or at the bottom of the overall cycle. Our guidance for the year (FY22) is showing, I think it is a 17% increase in operating income. Another example, in last quarter, we secured a 13% increase in rental income on 2.2 million sq ft. We are now about to payout again for the 9th consecutive quarter, Rs 536 crore, and that total since we listed is now Rs 4,250 crore. That is a 34% total return since we listed. I think we are looking to increase our distributions this year by 11% on last year.
In FY22, 1.9 MSF of leases expire, of which you expect 0.5 MSF as likely renewals. How is the progress?
In Q1 FY22, we renewed 80% of 0.5 MSF, and we have got three quarters to go. That is a pretty good place to be. We have given out our guidance with a fairly broad range, plus minus 3.5%.
Your vacancies at 18% are over the comfort zone of 13-14%. Is it worrying?
On market basis, what you see is big gaps or variances in different market. For instance, in Mumbai the number that CBRE put out is about 20%. You will find that there are areas or locations or buildings the vacancies are less or more. Some people chart Bangalore at 9-10% in vacancies at the end of Q1 FY22. Some parts of Bangalore are still at 4%, and therefore obviously some parts are at 12%. The lowest vacancy city in the country by a long way is Bangalore and that is where we have 72% of our portfolio. Highest vacancy is in Kolkata. I think it is closer to 40%, and that’s why it is not on our list of cities for acquisition. We think vacancies will come down in due course, particularly in technology focussed markets.
What are your expansion plans?
We will follow where our customers want to be — tech firms, IT services, technology product companies and global captives. They are going to the top 6 metros and we are already in four. So we would certainly look to grow in our existing metros and look to expand in Hyderabad and Chennai. We have two great sponsors for the REIT. From Embassy group we acquired Embassy Tech Village last year.
What is the 6-12 months outlook for the office segment?
We got 200-odd international companies as our tenants. We talk to banking analysts, brokers, customers, etc. I think our conclusion is as follows. The companies are working hard on the vaccine programme. For instance, I think about 120 of our tenants have reported back to us that they have done vaccinations of 110,000 of their employees and families. I think the companies are really looking at bringing people back in numbers in the fourth quarter of this calendar year. That is the general sentiment. There may be more flexibility in the way they work. We anticipate that in early-2022, we will see latent demand that is coming from hiring will start translating into office leasing.