Investors look to US office space, Indian warehouses

Thanks to Covid disruptions, office and shopping mall rentals are no longer attractive

Domestic business houses and high net worth individuals (HNIS) are betting big on investing in warehousing in India and office space in the United States to hedge the risks in their real estate portfolio that have emerged from Covid-19.

Domestic office rentals, in which HNIS put in the bulk of their money, are now under severe pressure. As work-fromhome becomes the norm, companies are trimming real estate requirements to cut costs. Yields on rentals from shopping malls have also dropped sharply as a result of frequent closures during lockdowns and curfews, especially during the second wave.

Vishal Ahuja, head of the private wealth group at JLL India, which deals with domestic HNIS, said there has been a 1015 per cent increase in transactions for office space in the US as compared to pre-pandemic times. “Earlier, out of their overall office real estate portfolio, less than five per cent was in the US. Now it is roughly over 10 per cent,” said Ahuja.

HNIS are willing to put in ~20-50 crore to test the US waters since yields on rentals in US office real estate have gone up from around five per cent in pre-pandemic days to 7-7.5 per cent now.

This figure might be lower than the eight per cent that is traditionally offered in India for good office space, which is not easy to find here with reputed tenants.

More importantly, there is uncertainty in India over the extent to which rentals will be squeezed when the lease ends because of the flux caused by the pandemic. It’s expected that as much as 20 million square feet of space is coming up for renewal this year and most corporate entities will be looking to push rents down.

The US has two other advantages. First, the lease tenure is around nine years, unlike five to six years in India. Second, tenants respect and value contracts, minimising the risk.

It’s HNIS with good overseas experience and diversified interests who are jumping into the US market. “We have businesses abroad and understand how the real estate market works, especially in the US. It makes immense sense as the returns are less volatile and good quality secured assets are available,” said the CEO of a family office of one such business house in Mumbai.

The even bigger bet is warehousing. The boom in e-commerce during the pandemic has led to a huge demand for warehousing capacity. In Januarymarch, over nine million square feet of warehousing space in India was absorbed, compared to 26 million sq ft in the calendar year 2020.

Anshu Singhal, managing director, Welspun One, which buys land and builds and leases warehouses to leading corporations, said the rapid acceleration in e-commerce during the pandemic was driving the demand for warehousing.

“Through Covid-19, warehousing demand from investors has increased further, given that being essential services, warehouses have been insulated from the otherwise difficult economic situation,” said Singhal. “In India, large companies typically enter into a 5- to 15-yearlong lease. Investors can participate in the development of these assets at yields of 10 per cent or purchase ready, operational assets at yields of 7.5-8 per cent, which makes it a very attractive proposition.”

The turnaround time to build a warehouse of one million square feet is only 12-15 months. For an office, it is four to five years.

And, it’s possible to get topclass tenants such as Amazon or Flipkart as clients, backed by secure long-term leases ranging from five to 15 years with an escalation of 4-5 per cent every year. (In offices, lease tenures are five to seven years at most.)

To cash in on the opportunity, Welspun One has floated a ~500-crore fund, Welspun One Logistics Park Fund, exclusively for domestic HNIS and family offices with a tenure of four years for money that will be invested only in creating warehousing infrastructure.

The average ticket size of an investment is between ~2 crore and ~5 crore. Half a dozen HNIS have put in ~10-20 crore. By next year, based on the interest generated by the first, Welspun is looking at a second fund.

What’s also attractive is that the warehouse market is no longer fragmented. With unorganised players offering B-grade non-compliant assets, big companies such as Indospace and Blackstone have been moving in. They have consolidated the business in the past few years, offering high-quality, legally compliant, hassle-free and large-sized assets for investors to put in their money.

The appetite in warehousing remains strong, given the resilience shown by the sector throughout Covid, and it being the least impacted real estate segment, says Rajesh Jaggi, vice chairman — Real Estate, Everstone Capital, which controls Indospace. “With the backing of our global investors, we continue to remain bullish on acquisitions in 2021.”