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ANALYSIS

Indian office towers rise above economic slump

IT'S getting easier to access Indian office towers. A Blackstone-backed US$4 billion commercial real estate investment trust, the country's first of its kind and the largest in Asia by square footage, has defied a broader economic slowdown and has been well-received since its market debut six months ago. It heralds more opportunities to enter this higher-yielding market.

Property investing for Indians used to mean buying houses for cash, mostly hidden from the tax authorities. New regulations and levies make it harder and have contributed to a massive oversupply. It would take 31 months to deplete existing inventory, according to analysts at financial services outfit Edelweiss. They reckon home price growth has tumbled from an average annual rate of 9 per cent earlier in the decade to as low as 1.3 per cent. Rental yields are stuck below 3 per cent.

Returns are more lucrative in the prime commercial market, where supply has kept better pace with demand. Multinational tenants such as IBM and JPMorgan also have forced landlords to be more fastidious. Large investors, including Canada's Brookfield Asset Management and international pension funds, have piled in buying entire office buildings.

The initial public offering of Embassy Office Parks Reit, the Blackstone venture with 33 million square feet of top-notch sites in Bengaluru and beyond, has opened the doors to a bigger group of investors.

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A dividend yield that exceeds 6 per cent will be enticing as GDP growth and interest rates fall. A 27 per cent increase in the stock price should inspire copycat real estate collections, especially for cash-strapped developers who may need to offload parts of their portfolios.

Entrepreneurs are also seeking to capitalise. Startup hBits, for one, is courting investors by offering fractional ownership of office space. It is touting potential returns of up to 18.5 per cent, from a combination of rental income and value appreciation, with a minimum investment of about US$35,000.

An accelerated downturn worldwide or a weaker India would lead to higher vacancy rates. They tripled to over 20 per cent after the global financial crisis, but have fallen again, to below 14 per cent.

As the number of Reits increase, it will be important to keep an eye on regional differences in quality. For now, this is a welcome Indian property development.

The Blackstone-backed commercial property venture is India's first publicly-traded real estate investment trust, and the largest in Asia by square footage. It owns and operates 33 million square feet of so-called Grade A, or high-quality, office parks and centres across Mumbai, Pune, Bengaluru and the National Capital Region. BLOOMBERG