In an identical story, once more this yr, Blackstone needed to promote a part of its stake in Embassy Office Parks REIT. The deal talks with non-public fairness investor Bain Capital didn’t go wherever.

REIT is brief for actual property funding belief. It features like a mutual fund—a sponsor raises capital and invests it in actual property tasks like workplace parks or procuring malls. REITS permit smaller retail traders to personal a portion of income-generating actual property properties that may in any other case be unaffordable.

India has three workplace REITS—the Mindspace Business Parks REIT, the Embassy REIT and the Brookfield REIT. Blackstone was a sponsor to Mindspace and Embassy.

In January 2022, Blackstone offered its complete 9.2% stake in Mindspace Business Parks REIT to Abu Dhabi Investment Authority (ADIA) for $235 million, at a 16% premium over the REITS’s August 2020 preliminary public providing (IPO) value. It additionally made a partial exit from the Embassy REIT in September 2022. It offered round 8% stake by open market block offers for $326 million.

But the markets have modified since then.

India’s largest workplace landlord has struggled to search out patrons for a great valuation in 2023. In truth, there have been no large bang exits for a yr now, with market watchers citing Blackstone’s return expectation from capital invested to be approach greater than what patrons are prepared to pay—in the meanwhile.

Private capital markets have shrunk and exits by non-public transactions have change into a problem. Most of the big gamers—other than Blackstone, there may be Brookfield Asset Management, GIC, ADIA, CapitaLand Group and Ivanhoe Cambridge—have sufficient on the desk and there are hardly any new traders within the Indian market.

For asset managers like Blackstone and Brookfield, exits from lease producing property are crucial. Blackstone has a fund construction and the corporate must return cash to its traders, churn the capital. Rent producing workplace properties usually generate 7-8% yield, and there’s no level holding on to them for lengthy as a result of a sale might fetch the next return.

While large ticket exits have dried up, workplace house acquisitions are on the sluggish lane, too. Blackstone’s final large workplace acquisition was in 2020 when it acquired Bengaluru-based developer Prestige Group’s workplace parks and procuring malls for $1.6 billion, one of many largest actual property portfolio buys again then.

And once more, market forces are at play. Office actual property builders aren’t prepared to promote—in the meanwhile.

There are a number of considerations. Global firms are taking longer to determine on growth and the US tech sector has slowed down. As a consequence, actual property markets that depend on the tech sector, reminiscent of Pune, Hyderabad and pockets of Bengaluru, have an oversupply of stock. In addition, the hybrid work mannequin, submit the pandemic, has taken the sheen off the demand for places of work. Blackstone, whose actual property investments in India have an enterprise worth of $20 billion, will not be resistant to such headwinds. The firm is slowing down within the workplace market however increasing elsewhere (extra of this later).

“We are treading cautiously. But, it doesn’t imply we won’t do any workplace transactions or investments within the subsequent 24 months,” Asheesh Mohta, head of real estate acquisitions, India, at Blackstone, said. “From an asset class perspective, the office market continues to hold massive potential. But in the next 12-24 months, we will be more selective about what we do,” he added.

“Blackstone goes sluggish however the truth is that giant workplace offers are additionally not occurring. Sellers know this isn’t the most effective time to promote as a result of they gained’t get the worth. Office builders, backed by institutional traders, are effectively capitalized and are prepared to attend until the market improves,” mentioned Shobhit Agarwal, managing director and chief government officer (CEO) of Anarock Capital, an funding banking advisory.

So, what precisely is the asset administration firm’s technique, going forward?

Where will it make investments?

The New York-based investor has been in India for over 15 years now; it opened an actual property division in 2007 and signed its first transaction in 2008, shopping for a minority stake in Synergy Property Development Services Pvt. Ltd, an asset administration agency. Blackstone began shopping for workplace property solely in 2011. At that point, not many traders have been within the prime rental asset class. For Blackstone, the workplace sector was a contrarian guess when everybody eyed residential.

The guess labored over the following a number of years. Blackstone constructed and scaled its portfolio by developer partnerships for under-construction tasks and acquisitions of prepared workplace property. Capital was by no means an issue and nonetheless isn’t.

With allocations from Blackstone’s $30 billion world fund and an $8.1 billion Blackstone Asian Opportunistic Fund, the corporate has sufficient dry powder. But with the market slowing down, the place will it make investments its money now?

“We have been selective about the place we make investments, who we make investments with, and wherein micro-markets. Mumbai and components of Delhi-NCR look good with not a lot provide. We would like to do extra (investments) in Mumbai,” Mohta mentioned.

Blackstone is at present exploring two potential acquisition alternatives of prepared workplace property, in Mumbai and Gurugram. The Gurugram deal might shut within the subsequent few months.

Given the oversupply concern within the tech-dependent markets, its investments in under-construction tasks in these markets will likely be by current partnerships.

“Blackstone is unlikely to do a brand new partnership with a developer now. The goal will not be a lot to develop the portfolio however to keep up it, and and make exits,” mentioned Piyush Gupta, managing director, capital markets and funding companies, Colliers India, a property advisory agency.

Meanwhile, workplace leasing is but to achieve the 65 million sq ft mark of 2019, as per knowledge from CBRE. While the market has recovered from the lows of the pandemic years, this yr’s gross leasing is predicted to be decrease than in 2022 (56.5 million sq ft). Analysts imagine {that a} pick-up in leasing is crucial for brand new investments to kick in.

The REIT drawback

Earlier this yr, Blackstone was planning yet one more REIT. This time, a mega one that may have mixed the workplace property of Nucleus Office Parks— an workplace platform absolutely owned by Blackstone—and people of Panchshil in Pune and Sattva in Hyderabad. Overall, this totalled over 40 million sq ft of workplace house.

The REIT plan was paused for some time however then revived. It is prone to be listed in 2024.

REITS are below strain, when it comes to each pricing and valuation. Currently, they’re buying and selling at a 15-20% low cost to their web asset worth (property minus liabilities), as per an ICICI Securities report. They are anticipated to underperform within the close to time period resulting from components together with the delayed implementation of the Development of Enterprise and Service Hubs (Desh) Bill, which seeks to switch the prevailing legislation for particular financial zones (SEZs). The present incentive construction on SEZs might change as soon as the brand new legislation is carried out. Some of the SEZs might get denotified for numerous causes, together with under-utilization.

The delay in denotifying SEZs and the uncertainty round it might influence exits for traders, analysts mentioned. A bulk of the workplace house holdings by REITS is in SEZ house. Investors will not be eager to purchase into SEZ house till there may be readability.

“The delay (in notification) has led to vacancies in workplace areas in SEZs and occupiers are additionally ready to take a choice on taking over house or shifting out relying on the result,” Ram Chandnani, managing director, advisory and transaction enterprise, CBRE India, a property advisory agency, mentioned.

In addition to the confusion round SEZs, different causes talked about earlier within the copy are additionally impacting REITS, reminiscent of sluggish tech hiring and hybrid working. A restoration is predicted within the subsequent 12-24 months.

“We are fiduciaries of our traders’ capital, and our aim is to supply sturdy returns for them. The pricing of a few of these REITS will enhance over time. We will have a look at exits when the time is correct. We will not be in a rush and are conserving our choices open,” Mohta mentioned.

“We have accomplished three of the 4 REITS which are listed. That’s a market we all know very effectively. Investors perceive we’re credible sponsors and that we are going to deliver good high quality property. There can be non-public investor curiosity in a few of these property,” Mohta added. “Today, I do think some of these REITS are undervalued. It’s just a reflection of the global macro environment. It’s temporary”.

Apart from the 2 workplace REITS, Blackstone is a sponsor of a retail REIT, the Nexus Select Trust REIT. It made its inventory market debut in May 2023. This REIT largely has city consumption centres (malls), resort property, and some workplace property.

A saviour?

While asset managers like Blackstone are impacted due to the slowing workplace market, not each participant is. Think of GIC, Singapore’s sovereign wealth fund.

Recently, it partnered with Brookfield India REIT to accumulate two massive business property, in Mumbai and Gurugram, from Brookfield Asset Management’s actual property non-public fairness division for an enterprise worth of $1.4 billion.

GIC, which has nearly travelled the identical classic as Blackstone in India, has been essentially the most aggressive within the present market and has been scouting for prepared and lease producing workplace property. Being a sovereign fund, it has no strain to return cash. It has a free runway with little competitors.

If Brookfield or Blackstone must exit an funding, GIC could be an apparent possibility, analysts identified.

New bets

In the meantime, Blackstone is quick diversifying past workplace property. India’s actual property market has different scorching propositions. Logistics parks are one in every of them with a rising thrust on home manufacturing and geopolitical shifts from China to India.

In 2022, Blackstone arrange a logistics vertical referred to as Horizon Industrial Parks to deal with its current logistics property. It could be scaled up by acquisitions and greenfield developments. In a brief span, Horizon, with a portfolio of 25 million sq ft and 17 parks throughout eight cities, is among the many prime logistics builders, other than Indospace and ESR Logistics.

While workplace investments have been measured, Blackstone mentioned final yr that it might make investments ₹4,500 crore and double its logistics portfolio over the following 24 months on the again of accelerating demand for organized warehousing house.

“Logistics demand continues to be very sturdy. Our logistics portfolio is 95% occupied, and within the areas we’re in—in case you construct, there are tenants ready to take up house,” Mohta mentioned.

Property consultants mentioned that the logistics market might witness consolidation.If there may be an acquisition alternative, Horizon might aggressively compete.

Apart from logistics, Blackstone can be betting on knowledge centres, yet one more scorching market contemplating the explosion of information and the Indian authorities’s stress on knowledge localization. The authorities believes that the information of Indian residents, notably monetary knowledge, should reside inside Indian borders.

In 2022, Blackstone created a knowledge centre platform, Lumina Coundinfra, and mentioned that it might make investments round $300 million in its first knowledge centre campus in Navi Mumbai.

Blackstone’s remaining bets are on procuring malls and hospitality. Both the sectors have seen sturdy restoration submit the pandemic. The asset supervisor, which had acquired a bunch of malls as a part of the acquisition cope with Prestige Group, at present has 17 malls below the Nexus Malls model, spanning 10 million sq ft in retail portfolio.

“Retail is nearly like a nasty phrase in some components of the world. India is an exception. But when it comes to acquisitions, there are fewer property because it’s an working enterprise,” Mohta mentioned.

Can these bets offset the present and future slumps within the workplace sector? It will take time. Of Blackstone’s enterprise worth in actual property property of $20 billion in India, over 80% is as a result of workplace portfolio.

(Ranjani Raghavan contributed to the story)