Embassy REIT: Improving ESG Performance

Embassy Office Parks REIT owns, operates, and invests in rent or income-generating real estate and related assets in India. It is India's first publicly listed REIT and Asia's largest official REIT by area.

The Embassy REIT’s office parks are best-in-class as they offer modern amenities and infrastructure that meet the global standards of its global occupier base. It also offers strong rental growth potential due to its large already-paid-for under-construction area. Due to the legacy portfolio, the rentals for the portfolio are significantly below prevailing market rentals.

Embassy In is currently focusing on improving ESG performance by introducing green leases, green loans and supplying 75% of its portfolio with renewable energy, and acquiring either large assets or marque downtown assets even as it evaluates its Chennai ROFO asset.

There are at present 32msf of requests for proposals (RFP) for leasing office space in the market, 60% of which is for Bangalore. Most of these RFPs are from global captives rather than pure information technology companies, reflecting an improved quality of work outsourced to India. 
Also, most of these RFPs (c65%) are from existing occupiers rather than new occupiers entering India. Interestingly, a majority of RFPs are for built-to-suite (BTS) office space which is expected to take occupancy over the next 2-to 3 years. Further, these new RFPs continue to be a mix of new demand and consolidation by existing occupiers. 

The performance on ESG metrics is incrementally becoming qualifying criteria for new leases as occupiers strive to achieve their ESG targets. While Embassy continues to maintain that there is not enough competing supply, our analysis seems to suggest that developers are largely prepared to bring more supply as some component of future supply is pre-leased, and new proposals for BTS will also drive new construction. 

There is also an increase in the share of new leases where the tenant has asked for fit-outs, although this is still in the minority and our analysis suggests decent protection for landlords. These leases typically offer 12-14% IRR on fit-out costs. Near term, developers think that April is likely to see improved in-office attendance.