Realty developers with rental assets to profit from boom in office space

Realty developers with rentals are set to benefit from an ongoing boom in office and retail property absorption.

DLF’s rental arm, DLF Cyber City Developers (DCCDL) is likely to have a rental Ebitda (earnings before interest, taxes, depreciation and amortisation) of Rs 30 billion this financial year. It is expected to continue seeing at least 10 per cent annual rental income growth over the next four to five years. This would be driven by another 4 million sq ft of assets becoming operational, along with another 24 mn sq ft of land bank in the rental arm, according to a report by ICICI Securities.

Bengaluru-based Prestige Estates is expected to have annual rental Ebitda of a little over Rs 11 billion by 2020-21, from Rs 7.3 billion in 2017-18. Another Bengaluru-based developer, Brigade Enterprises, is expected to see its rental Ebitda rising to Rs 5.3 billion by FY22, from Rs 2.4 billion in FY18, it said.

Mall developer The Phoenix Mills is expected to see its existing malls cross Rs 11 billion in rental Ebitda by FY21, from Rs 8.7 billion in FY18. Also, to add a little over Rs 5 billion in such rental earnings from new capital expenditure across malls by 2022-23.

“We argue that companies already having an operational portfolio of annuity assets, and significantly investing in capex to add more such assets, will have a sizable recurring revenue stream in another two to three years, which will account for 60-70 per cent of their EV (enterprise value, the sum of a company’s market capitalisation and its debt, minus the cash and cash equivalent),” says Adhidev Chattopadhyay, research analyst with ICICI Securities.

Adding: “All the large annuity players in the country have access to a pool of global capital to fund their growth, rather than taking on more leverage on their own balance sheets. These annuity assets would act as a cushion for valuations in all these companies through cycles.”

Singaporean fund GIC has taken the promoters’ stake in DLF’s rental arm. Canada’s CPPIB has formed a joint venture with Phoenix Mills to develop malls.

Developers agree with the assessment. “There is acute shortage of Grade-A office properties and huge demand for these in cities. Developers with strong balance sheets can invest capital in the development of such assets and take the advantage in the boom in absorption,” said Vikas Oberoi, chairman at Oberoi Realty. The company plans to add malls in its coming residential projects.

Chattopadhyay’s analysis is based on a boom in absorption of office property. A little over 37 mn sq ft is expected to get absorbed in the top seven cities of the country next year, earlier achieved in 2011, says property consultant JLL.

“During the next two years (2019 and 2020), these seven markets are expected to witness net absorption of over 76 mn sq ft. We expect around 126 mn sq ft of robust supply in the next three years, based on launch of new projects in several markets,” had said Ramesh Nair, chief executive at JLL India.

With 8.2 per cent growth of gross domestic product in the June quarter of this financial year, and India’s position improving considerably in the World Bank’s Ease of Doing Business index, the economy was on a strong growth path. 

“This will have a positive impact on the real estate sector, especially demand in the commercial office segment. For developers, it will be a fruitful step to invest in creating more commercial office spaces to reap the benefits the sector has to offer,” he said. Chattopadhyay says superior-quality malls with the right tenant mix continue to attract footfall. These have emerged as entertainment destinations, the focus being on food and beverages, gaming, multiplexes and events. 

“While the rise in Indian government security yields of close to eight per cent make an argument for possible expansion in cap rates for annuity assets (we assume a nine per cent rate across companies), we are of the view that these Grade-A assets command a scarcity premium and that cap rates for high quality assets should continue to see valuation multiples sustain,” he said.

Commercial outlook bright

• DLF’s rental arm DLF Cyber City Developers is likely to have a rental Ebitda of Rs 30 billion this fiscal year
• Prestige Estates is expected to have annual rental Ebitda of a little over Rs 11 billion by 2020-21
• The Phoenix Mills is expected to see its existing malls cross Rs 11 billion in rental Ebitda by FY21
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