India has advantages in outsourcing
India is a world leader in outsourcing for large mutinationals1. This Business Process Outsourcing (BPO) sector has continued to grow, buoyed by growth in global Information Technology (IT) spend and trends towards seeking increased efficiencies as well as better cost outcomes. The Indian operations of many large global corporates (Cisco, Dell etc.) are now so significant, it would be hard to operate without this sizable talent pool. In our opinion, there are four main reasons that India has become supreme in this area.
Firstly, India offers competitive costing2. A full stack developer in India commands about 1/8th the salary as a US based equivalent, taking into account years of experience and academic qualification. Secondly, the proficiency of the English language in key Indian cities are far superior3 than global counterparts and above the average of Asia Pacific. Thirdly, a deeper dive into India’s tertiary education system reveals a high number of graduates in the areas of Science, Technology, Engineering and Mathematics4. These are high demand subjects that are integral to creating efficiencies and better cost outcomes. Taking a step back, the demographics presents the fourth and major reason why firms are flocking to India. The United Nations estimates5 that India has a young and growing workforce accounting for over 46% of the 0-24 age range.
Bangalore levered to outsourcing growth
This population growth has seen the city enter in to “megacity” status in 2015 (see below) and population growth forecasts keep exceeding estimates. This bodes well for real asset demand in property, but also across other real asset sectors. The UN has currently forecast the city’s population to finish the 2010-2020 decade up 49%6. This top quartile growth has far surpassed earlier UN forecasts7 (Chart 1).
CHART 1: Bangalore is growing into a megacity (10 million people)
Chart 1 Source: United Nations, Department of Economic and Social Affairs, Population Division (2007, 2018).
One real asset sector which is benefiting from the increased job and population growth is property. In Bangalore, we see a striking example of this. Office demand has seen some of the strongest levels of any city globally. Interestingly, most large Indian cities have seen office absorption well above other large global cities over the last 5 years8. Large multinationals such as Ford, Cisco, Microsoft, and IBM have significant operations in India, and the roles based there are across a range of services including design, IT and engineering. In the case of Cisco, its Research & Development facility in Bangalore is its largest outside the US9. The quality, cost and sheer number of engineers that can be sourced in a place like Bangalore is very hard to replicate anywhere else.
CHART 2: Office space absorption in Bangalore outstrips major global cities
Chart 2 Source: CBRE Research (2019), Embassy REIT. Bengaluru (also called Bangalore) is the capital of India's southern Karnataka state.
Embassy Office Parks REIT (“Embassy REIT”)
Embassy REIT is India’s first REIT and had its initial public offering in April 2019. It is the largest office REIT in Asia by floor space with a focus on high quality business parks. What is also key is that Blackstone and Embassy Group are sponsors which lends credence to investment proposition. Embassy REIT owns and operates a 33.3 million square feet portfolio of seven Grade A office parks and four city-center office buildings in India’s best performing office markets of Bengaluru, Mumbai, Pune and the National Capital Region.
Amongst its tenants, you will find the largest names in Technology and Financial Services (Chart 3). This is a REIT that is housing the pillars of growth and innovation for tomorrow’s digital economy.
CHART 3: : Occupants mostly in Technology, Finance and Research
Chart 3 Source: Company website, Investor Presentation, May 2020. Represents industry diversification percentages based on Embassy REIT’s share of gross rentals
Another area that Embassy REIT has in its favor is its management of leverage. Its current debts levels are low by industry standards Chart 4). This gives management debt headroom to pursue acquisitions or weather economic uncertainty.
CHART 4: A low net debt to Total Enterprise Value (TEV) ratio enables financial flexibility
|Net Debt to TEV||15% vs 44*|
|Net Debt to EBITDA||2.7x|
|Interest Coverage Ratio|
|- Excluding capitalized interest||5.1% vs 3.5x*|
|- including capitalised interste||4.0x|
|Available Debt Headroom||
Chart 4 Source: Company website, Investor Presentation, May 2020. *FTSE NAREIT All REIT Index, leverage ratios as at 31 December 2019. TEV refers to Total Enterprise Value. EBITDA refers to Earnings Before Interest, Tax, Depreciation and Amortization.
Corroborating its strong financial position, is how Embassy REIT gets the majority of its income. Over the last year, net operating income has grown by 15% (Chart 5), supported by 48% of contracted revenue and 47% of vacancy lease-up and marked to market growth.
CHART 5: A stable net operating income profile (Net Operating Income in ₹ million)
Chart 5 Source: Company website, Investor Presentation, May 2020. NOI refers to Net Operating Income. MTM refers to Marked to Market,
All the above evidence culminates into a dividend yield of 8.02%10. Far above global bond yields (1.01%)10, Asia Pacific ex Japan equity dividend yields (2.93%)10 and higher than Asia ex Japan REIT dividend yields (5.08)10.
The bottom line
BPO and demographic trends look good for Indian office REITs’ future. Regardless of any ups and downs in the economy, one can be positive on India from a Real Asset perspective. The country remains an internally focused economy, with high levels of population growth and a rapidly growing middle class, key drivers of Real Asset growth. In addition, Indian outsourcing leadership and its young, skilled work force look attractive for ongoing commercial office demand, especially in a world in which corporates are seeking to lower costs through automation, outsourcing and increasing IT spend.
1 : A.T. Kearney, Statista (2019), Digital Resonance: The New Factor Impacting Location Attractiveness. GSLI overall country rankings
2 : Stack Overflow (2019), Developer Survey. Comparison of Indian and US median annual salary for full-stack developer with 5 years’ experience and a bachelor’s degree
3 : EF EPI (2019), EF English Proficiency Index: India. EF EPI score
4 : World Economic forum, Human Capital Index and UNESCO (2016), The Human Capital Report. Global Distribution of recent graduates of Science, Technology, Engineering and Mathematics ("STEM") subjects
5 : United Nations, Department of Economic and Social Affairs, Population Division (2019). World Population Prospects. The 2019 Revision. File POP/8-1: Total population (both sexes combined) by broad age group, region, subregion and country, 1950-2100 (thousands); based on estimates for 1 July 2015.
6 : United Nations, Department of Economic and Social Affairs, Population Division (2018). World Urbanization Prospects: The 2018 Revision. File 12: Population of Urban Agglomerations with 300,000 Inhabitants or More in 2018, by Country, 1950-2035 (thousands)
7 : United Nations, Department of Economic and Social Affairs, Population Division (2007, 2011, 2014, 2018). World Urbanization Prospects: The 2007 Revision, World Urbanization Prospects: The 2014 Revision , World Urbanization Prospects: The 2014 Revision.
8 : CBRE Research (2019), Embassy REIT. Years refer to the calendar year ending December 31 respectively.
9 : Cisco (2019), Cisco India Overview
10 : Bloomberg. Data as at 29 June 2020. Global Government Bonds refer to the Bloomberg Barclays Global Aggregate Index, data as at Asia Pacific ex Japan equity refers to the MSCI Asia Pacific ex Japan Index, data as at 29 May 2020. Asia ex Japan REIT refers to the FTSE EPRA NAREIT Asia ex Japan REITs Index, data as at 29 May 2020.
Source: Legg Mason and Martin Currie. Data and estimates as at 29 May 2020 unless otherwise stated.
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