Brookfield India Real Estate Trust
About the Brookfield India Real Estate Trust
The Brookfield REIT is India’s only institutionally managed public commercial real estate vehicle. Sponsored by an affiliate of Brookfield Asset Management (BAM), one of the world’s largest alternative asset managers with approximately $575 billion in assets under management, as of September 30, 2020, its goal is to be the leading owner of high quality income producing commercial real estate assets in key gateway Indian markets, which have significant barriers to entry. It seeks to achieve this objective through the performance of its high quality Initial Portfolio, driven by proactive portfolio management, maintaining a prudent capital structure, implementing corporate governance framework aligned with best market practices, and access to Brookfield’s global platforms, which provide it a breadth of resources, relationships and expertise. Further, to execute its strategy, its Manager, which is an affiliate of Brookfield, has an on-ground professional management team with extensive industry experience, domain knowledge and a strong track record of value creation.
In line with its strategy and business plan, it owns an Initial Portfolio of four large campus-format office parks, which are ‘business-critical’, located in some of India’s key gateway markets - Mumbai, Gurugram, Noida and Kolkata. Its Initial Portfolio totals 14.0 msf, comprising 10.3 msf of Completed Area, 0.1 msf of Under Construction Area and 3.7 msf of Future Development Potential.
It intends to leverage Brookfield Group’s real estate holdings in India by entering into agreements that provide rights to acquire their existing properties in its markets. It has the exclusive right, at its discretion, to acquire the Identified Assets, one office park in each of Gurugram and Noida, similar to the office parks in the Initial Portfolio that are near-stabilization and currently owned by members of the Brookfield Group. The Identified Assets encompass 8.3 msf of office space. In addition, it will also benefit from rights of first offer on the ROFO Properties - the Brookfield Group’s 100% owned commercial real estate assets in India’s financial capital, Mumbai, comprising 6.7 msf in office space. The Initial Portfolio, Identified Assets and ROFO Properties combined, creates the potential for it to almost double its Initial Portfolio’s Leasable Area to 28.9 msf, while growing consistent with its strategy of owning high quality real estate in premier locations.
Proceed is being used for:
The real estate sector is one of the important sectors of the Indian economy because of its multiplier effect. An impact on this sector has a direct bearing on economic growth of the country. The bulk of demand for Grade-A1 office stock in India is from multinational corporates based out of the United States and the European Union. The demand for quality office spaces has also led to rental growths growing at a CAGR of approximately 4.2% over the last 5 years. The net absorption of office spaces in Mumbai and National Capital Region (which includes Gurugram and Noida and hereinafter referred to as NCR) has been in-line with major global office markets led by low per capital supply, growth of technology services sector, increasing traction from international tenants and attractive rentals.
India’s office real estate landscape has significantly evolved over the last decade. From majority of office stock being unorganized into single standalone buildings with no amenities, the landscape has now consolidated with Grade-A developers owning large modern corporate IT parks with a rich amenity mix. The focus of developers on Grade-A commercial developments, backed by institutional capital and increasing demand from multinational tenants, has led to the onset of campus developments. Multinational tenants have a strong preference for such developments due to a well-curated amenity mix and better employee experience. As a consequence, these campuses operate at lower vacancies and above average rental levels as compared to the micro-market in which they are located.
The technology industry, which is the mainstay of office demand, is one of the global success stories of India and has outperformed the GDP growth rate with an 11.3% CAGR (between FY 2014 and FY 2019). Importantly, the Indian technology sector continues to evolve as the focus is moving from just cost excellence towards creating business impact as Indian companies and Global In-house Centres (GICs) (also known as Global Capability Centers (GCCs)), now provide end to end services to their clients. COVID-19 has accelerated the structural shift that was already underway prior to the crisis in relation to usage and deployment of technology especially cloud, data analytics, e-commerce and digital transformation. The global spending on software and IT services is expected to grow at a robust rate between the financial years 2020 and 2025 and the technology industry in India is expected to grow at a CAGR of 13% to $350 billion by financial year 2025 from an estimated $191 billion in financial year 2020 due to its large science, technology, engineering and medicine (STEM) talent pool, competitive cost advantage and favorable demographics.
Pros and strengths
Global sponsorship with local expertise: The Brookfield REIT is sponsored by an affiliate of Brookfield Asset Management, one of the world’s largest alternative asset managers and investors, with assets under management of approximately $575 billion across real estate, infrastructure, renewable power, private equity and credit, and a global presence of over 150,000 operating employees across more than 30 countries, as of September 30, 2020. Brookfield Asset Management is listed on the NYSE and TSX and has a market capitalization of approximately $63 billion, as of September 30, 2020. Its long-term success in executing its strategy will be supported by Brookfield’s extensive local market and asset knowledge in India. Brookfield has had a decade-long presence in India and manages a portfolio of approximately $17 billion across real estate ($4.6 billion), infrastructure ($9.7 billion), renewable power ($0.6 billion) and private equity ($2.1 billion), as of September 30, 2020. This portfolio in India provides valuable real-time, proprietary market data that it expects will enable it to identify and act on market conditions and trends more rapidly than its competitors.
Difficult to replicate, dominant and strategically located properties: Its office parks are ‘business-critical’ to its tenants and their employees. In addition to its diversified base of marquee tenants, its Initial Portfolio has a stable, long-term tenancy profile with staggered expirations and a WALE of 7.1 years, providing significant cash flow stability to its business. In its Initial Portfolio, 75% of Gross Contracted Rentals are contracted with multi-national corporations such as Barclays, Bank of America Continuum, RBS, Accenture, Tata Consultancy Services and Cognizant. Its tenants operate in a diverse range of industries such as technology, financial services, consulting, analytics and healthcare. Its Initial Portfolio’s Committed Occupancy has been above 94% at the end of the last four financial years, highlighting the stability of the business. During the period between April 1, 2015 and September 30, 2020, in-place rents per sf have grown at a CAGR of 4.8%, demonstrating the healthy rental growth achieved on the Initial Portfolio.
Placemaking capabilities: Placemaking is ingrained in the Brookfield REIT’s Manager and Sponsor’s design, development and operating philosophy, enabling it to provide its tenants with a unique ‘service-based experience’. The size and scale of its fully-integrated office parks allows it to deliver an all-encompassing workspace ecosystem to its tenants with modern infrastructure and amenities, including daycare facilities, premium F&B outlets, convenience shopping kiosks, shuttle services, multi-cuisine food courts and sports and fitness facilities, which further create an empowering and vibrant work environment for its tenants’ employees and elevates its properties to have a positive impact on its communities. As a result of the characteristics of its offerings, several tenants have relocated from other commercial properties to its office parks.
Experienced, cycle-tested senior management team: All properties in its Initial Portfolio, prior to the Issue, are owned and managed, directly and indirectly, by affiliates of BAM. As such, its Manager’s team has deep domain knowledge and experience in managing these properties and has demonstrated a robust track record in delivering value. Since April 1, 2015, its Manager has leased 4.3 msf and delivered 3.6 msf of ‘on-campus’ Completed Area within the Initial Portfolio. Its Manager is highly regarded in the real estate community and has extensive relationships with a broad range of tenants, brokers and lenders. Led by Alok Aggarwal (the managing director and chief executive officer – India office business of its Manager), its Manager’s team consists of 44 dedicated experienced professionals, as of September 30, 2020. The team has in-depth experience in real estate investments, asset management, research and property management, with the key managerial personnel and core team having an average of more than 25 years of experience in the real estate industry in India.
Risks and concerns
Profitability depends on performance of commercial real estate market in India: The success of the office parks in the Initial Portfolio are highly dependent on the performance of the commercial real estate market in India as well as general economic, demographic and political conditions. The commercial real estate market in India may particularly be dependent on market prices for developable land and the demand for leasing of finished offices, both of which will continue to have a significant impact on its business, results of operations and financial condition. The commercial real estate market may be affected by several factors outside its or its Manager’s control, such as prevailing global and local economic conditions, cyclical downturns as well as downturns in specific sectors where tenants occupying the assets in the Initial Portfolio are concentrated, such as the technology, consulting and financial services sectors.
Significant portion of revenue derived from limited number of tenants, sectors: The company is dependent on a limited number of tenants and sectors for a significant portion of its revenues. The 10 largest tenants accounted for 75%, 74%, 77% and 77% of the leased area, as of September 30, 2020, March 31, 2020, 2019 and 2018, respectively. Of these, three tenants, Accenture, Tata Consultancy Services and Cognizant accounted for 17%, 17% and 14%, respectively, of the leased area as of September 30, 2020. These three tenants are present in two of the four assets of the Initial Portfolio. The tenants in the technology sector accounted for 50%, 48%, 50% and 49% of the leased area of the Initial Portfolio, as of September 30, 2020, March 31, 2020, 2019 and 2018, respectively. Accordingly, its business, results of operations and financial condition and its Manager’s ability to make distributions to Unitholders may be adversely affected if one or more of these large tenants seek to prematurely terminate a majority of their lease agreements for any reason or experience a downturn in their business which may weaken their financial condition and result in their failure to make timely rental payments or result in such tenants not renewing their lease agreements. Similarly, a downturn in any of the sectors in which the tenants of the Initial Portfolio are concentrated and in particular, the technology sector may also adversely affect its business and prospects.
Business may be adversely affected by illiquidity of real estate investments: Real estate investments are relatively illiquid and such illiquidity may affect the ability of its Manager to alter its investment portfolio or liquidate part of its Asset SPVs. Further, under the REIT Regulations, a REIT is required to hold assets acquired by it for a period of three years from the date of purchase and in case of under-construction properties or under-construction portions of existing properties acquired by it, three years from the date of their completion. Real estate investments are relatively illiquid and such illiquidity may affect the ability of its Manager to alter its investment portfolio or liquidate part of its Asset SPVs. Further, under the REIT Regulations, a REIT is required to hold assets acquired by it for a period of three years from the date of purchase and in case of under-construction properties or under-construction portions of existing properties acquired by it, three years from the date of their completion.
Operate in competitive markets: It operates in competitive markets and competition in these markets is based primarily on the availability of Grade-A office premises. The principal means of competition are rent charged, location, services and amenities provided and the nature and condition of the premises to be leased. Competition from other developers in India could result in price and supply volatility which may adversely affect the ability of its Manager to lease the buildings in the Initial Portfolio and continued development by other market participants could result in saturation of the real estate market which could adversely affect its revenues from commercial operations, business, results of operations and financial condition.
Brookfield India Real Estate Trust is India's only institutionally managed public commercial real estate company, sponsored by an affiliate of Brookfield Asset Management (BAM), part of Brookfield Group. The company has campus-format office parks strategically located in Mumbai, Noida, Gurugram, and Kolkata. Its portfolio comprises of 14.0 msf with 10.3 msf completed area, 0.1 msf under construction and 3.7 msf are of future development. Its completed area has an occupancy rate of 92%. It has the exclusive right, at its discretion, to acquire the Identified Assets, one office park in each of Gurugram and Noida, similar to the office parks in the Initial Portfolio, that are near-stabilization and currently owned by members of the Brookfield Group. It is also one of the largest landlords in each of its micro-markets, allowing its Manager to create significant efficiencies in asset management, operations and tenant offerings. On the concern side, it does not own the trademark or logo for the ‘Brookfield India Real Estate Trust’ or ‘Brookfield India REIT’ and hence its inability to use or protect these intellectual property rights may have an adverse effect on its business and results of operations. Besides, a significant portion of its revenue is derived from leasing activities at Candor Techspace G2 and any adverse development relating to Candor Techspace G2 or the micro-market in which it is located may adversely affect its business, results of operations and financial condition.
The issue has been offered in a price band of Rs 274-275 per equity share. The aggregate size of the offer is around Rs 3793.77 crore to Rs 3807.62 crore based on lower and upper price band respectively. Minimum application is to be made for 200 units and in multiples thereon, thereafter. On the performance front, the Brookfield REIT’s total income increased by 5.5% to Rs 9,813.95 million for the financial year 2020 from Rs 9,298.30 million for the financial year 2019. It had a profit for the year of Rs 151.22 million for the financial year 2020 as compared to a loss for the year of Rs 157.45 million for the financial year 2019. It aims to continuously improve its properties to provide premium infrastructure and facilities for its tenants, including renovating and modernizing building lobbies, corridors, elevators, lighting, energy-efficient retrofitting and upgrading base building systems. It also intends to acquire high quality assets that complement and enhance its Initial Portfolio.