The outlook on property investment has changed in recent years, with more accessible, lower-cost options emerging, making it easier to invest in the property market.
The outlook on property investment has changed in recent years, with more accessible, lower-cost options emerging, making it easier to invest in the property market.
One such financial product, real estate investment trusts (REITs), has been gaining attention. These products offer investors access to the real estate market without the complexities of directly owning property.
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One such financial product, real estate investment trusts (REITs), has been gaining attention. These products offer investors access to the real estate market without the complexities of directly owning property.
However, going beyond traditional REITs, smaller REITs with capital investments of a minimum of Rs 500 crore are targeting specialised real estate segments such as co-working spaces. These spaces cater to startups, freelancers and existing businesses and have become integral to the modern workspace dynamics. For REITs, co-working spaces represent an attractive investment opportunity owing to flexible leasing structures, high occupancy rates and potential rental yields. Moreover, growing demand for such spaces in tier 1 and tier 2 cities also adds to their investment appeal.
Coworking space market
The coworking space market in India is growing rapidly, estimated at $1.94 billion in 2024 and projected to reach $2.72 billion by 2029. There are several factors contributing to this promising future.
Growth in entrepreneurship: India is seeing a surge in startups and freelancers preferring flexible workspaces over traditional offices.
Cost-effective: Coworking spaces offer a cost-effective solution compared to setting up and maintaining a traditional office, especially in prime locations.
Flexible work culture: As more companies adopt remote work policies, coworking spaces offer flexibility and amenities that are appealing to remote workers and digital nomads.
Networking opportunities: Coworking spaces foster communities where professionals from diverse backgrounds can collaborate and network.
Technology infrastructure: Improving technology infrastructure supports the seamless connectivity and digital operations essential to the modern workspace.
Corporate interest: Large companies are increasingly using coworking spaces to house project teams and satellite offices.
Government initiatives: Initiatives such as ‘Startup India’ and policies supporting entrepreneurship will further boost the growth of coworking spaces.
Let's take a look at some of the most prominent Indian listed companies that are poised to benefit from the potential growth in the commercial real estate market.
AWFIS Space Solutions
First on our list is AWFIS Space Solutions, a leading workspace solutions provider in India. AWFIS offers a wide range of flexible workspace solutions, from individual flexible desks to customized office spaces, to startups, SMEs, large corporates and multinational companies. The company operates across 52 micro markets across 16 cities in India under two models – straight leasing and managed aggregation, with a focus on the latter for improved profitability.
From FY20 to FY24, AWFIS' revenue registered a compound annual growth rate (CAGR) of 41%, while net profit grew at a compound annual growth rate of 12%. Despite the increase in revenue and operating profit, profitability at net profit level remains uncertain. As of March 31, 2024, AWFIS was debt-free and had a return on invested capital (RoCE) of 9%. The company had 181 centers in 17 cities at the end of FY24 with a total seating capacity of 110,540, maintaining an occupancy rate of 71%.
Going forward, AWFIS aims to build a capital-efficient model, focus on controlled expansion, and strengthen its product and service offerings. The company plans to add approximately 40,000 seats in FY25 to reach a total of 135,000 seats, while improving operational efficiencies through a strong vendor base, technology tools, and employee development. Management is confident of consolidating its position in the market and expects robust growth due to growing customer preference for flexible space.
Aurum Prop Tech
Coming in second is Aurum PropTech Ltd (APTL), which combines real estate technology expertise to build and operate PropTech products, services and platforms serving a range of sectors. APTL has two main business areas: Software as a Service (SaaS) and Real Estate as a Service (RaaS).
Over the past five years, APTL has seen a CAGR growth in revenue of 85% but a decline in net profit. The company's average return on equity (RoE) was 0.5%. Revenue grew 69% YoY in FY24, driven by 78% YoY growth in the RaaS segment and 25% YoY growth in the SaaS segment.
Going forward, APTL aims to achieve revenue growth of 45%-50% in the next financial year and improve EBITDA margins annually. The company sees a huge opportunity in institutionalizing rental real estate in India and will focus on product development and cost optimization. The management is working to reduce policy change risk and reduce dependency on individuals and relationships with a focus on analytics and customer relationship management (CRM) to improve customer experience and operational efficiency.
From FY20 to FY24, Mindspace's revenue grew 11% CAGR and net profit grew 3% CAGR. In FY24, the company saw its sales increase 7% YoY and its net profit increase 82.1%. The company achieved its highest ever quarterly leasing in FY2024, with cumulative leased area for the year at 3.6 million square feet. Committed occupancy was 90.6% (excluding Pocharam) and re-leasing spread on re-leased areas was 17%.
Going forward, Mindspace expects increased occupancy and healthy leasing activity in FY25, with the development expected to generate rental income of around INR 8,000 crore over the next three to four years. The company plans to earmark Special Economic Zone (SEZ) space to drive growth in Net Operating Income (NOI) and Distribution Per Unit (DPU).
Embassy Office Parks REIT
Finally, there is Embassy Office Parks REIT, India's first listed REIT and Asia's largest official REIT by region. Embassy Office Parks REIT owns, operates and invests in income-generating real estate and related assets in India, providing access to the benefits of real estate investment through its listed units. The trust's portfolio consists of commercial office space, hospitality and renewable energy assets.
From FY20 to FY24, revenue grew at a CAGR of 12% and net profit increased by 4.7%. FY24 was a breakout year with revenue up 8% year-on-year and annual gross lettable area reaching a record 8.1 million square feet. The company achieved occupancy guidance of 85% at portfolio level and 87% on a same-store basis, with occupancy at 91% in Bengaluru and 99% in Mumbai.
Looking ahead to FY25, the company expects NOI to increase 10% year-over-year and DPU to increase 7% year-over-year. Total leased area is expected to reach 5.4 million square feet, with portfolio occupancy expected to be 89%. Contracted rent growth is expected to be 13% on 7.7 million leased square feet.
Conclusion
The real estate industry, especially areas such as co-working spaces, is undergoing major change due to increased accessibility and changing work dynamics. Demand is expected to grow by 15-20% over the next 2-3 years, and could grow even more if macroeconomic conditions remain stable, presenting promising opportunities for investors.
However, the REITs and co-working industry in India is relatively new, so it is essential to carefully evaluate companies before putting your money in. As these sectors mature and adapt to changing workplace preferences, strategic investment decisions will be key to maximizing returns as the market grows.
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
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