One such financial instrument, Real Estate Investment Trusts (REITs), has been gaining traction. These instruments provide investors with access to the real estate market without the complexities of direct property ownership.
However, beyond traditional REITs, smaller REITs with a minimum capex of ₹500 million are targeting specialized real estate segments like co-working spaces. These spaces have become integral to modern workspace dynamics, catering to startups, freelancers, and established businesses. For REITs, co-working spaces represent a compelling investment opportunity due to their adaptable lease structures, high occupancy rates, and potential rental yields. Additionally, the growing demand for such spaces in tier 1 and tier 2 cities enhances their investment appeal.
The coworking space market
The coworking space market in India is growing rapidly, with an estimated market size of $1.94 billion in 2024, projected to reach $2.72 billion by 2029. Several factors contribute to this promising future:
Entrepreneurial growth: India has seen a surge in startups and freelancers who prefer flexible workspaces over traditional offices.
Cost efficiency: Co-working spaces offer cost-effective solutions compared to setting up and maintaining traditional offices, especially in prime locations.
Flexible work culture: With more companies adopting remote work policies, co-working spaces provide flexibility and amenities that appeal to remote workers and digital nomads.
Networking opportunities: Co-working spaces foster a community where professionals from diverse backgrounds can collaborate and network.
Tech infrastructure: Improving tech infrastructure supports seamless connectivity and digital operations, crucial for modern workspaces.
Corporate interest: Larger corporations are increasingly using co-working spaces to accommodate project teams and satellite offices.
Government initiatives: Initiatives like ‘Startup India’ and policies supporting entrepreneurship further encourage the growth of co-working spaces.
Let’s examine some of the most prominent Indian listed players poised to benefit from the commercial real estate market’s potential growth.
AWFIS Space Solutions
First on our list is AWFIS Space Solutions, a leading workspace solution provider in India. AWFIS offers a wide spectrum of flexible workspace solutions, from individual flexible desks to customized office spaces for startups, SMEs, large corporates, and MNCs. The company operates in 52 micro markets across 16 cities in India, under two models – straight lease and managed aggregation, focusing on the latter for improved return ratios.
From FY20 to FY24, AWFIS saw a 41% compounded annual growth rate (CAGR) in revenue, while net income grew at a CAGR of 12%. Despite revenue and operating income increases, profitability at the net profit level remained elusive. As of March 31, 2024, AWFIS is debt-free with a Return on Capital Employed (RoCE) of 9%. The company ended FY24 with 181 centers across 17 cities, totaling 110,540 seats, maintaining an occupancy level of 71%.
Going ahead, AWFIS aims to build a capital-efficient model, focus on controlled expansion, and enhance product and service offerings. The company plans to add around 40,000 new seats in FY25, reaching a total of 135,000 seats, and improve operational efficiency through a strong vendor base, technological tools, and employee development. Management is confident in solidifying its market position and expects strong growth due to increasing customer preference for flexible spaces.
Aurum PropTech
Second on our list is Aurum PropTech Ltd (APTL), which integrates tech expertise in real estate to build and operate PropTech products, services, and platforms catering to various segments. APTL has two main business segments: software as a service (SaaS) and real estate as a service (RaaS).
Over the past five years, APTL has experienced an 85% CAGR growth in sales, though net income has declined. The company’s average Return on Equity (RoE) stood at 0.5%. In FY24, revenue increased by 69% YoY, driven by a 78% YoY increase in the RaaS segment and a 25% YoY increase in the SaaS segment.
Looking ahead, APTL aims to achieve 45%-50% revenue growth in the next financial year and improve Ebitda margins annually. The company plans to focus on product development and cost optimization, recognizing significant opportunities in the institutionalization of rental real estate in India. Management is working to mitigate policy change risks and reduce dependencies on individuals and relationships, with a focus on analytics and Customer Relationship Management (CRM) to enhance customer experience and operational efficiency.
Mindspace Business Parks REIT
Mindspace Business Parks REIT is listed in India under the Sebi Real Estate Investment Trust Regulations, 2014. Mindspace REIT primarily holds interests in rental-yielding commercial real estate assets (Grade-A office portfolio). The company has properties in Mumbai, Pune, Hyderabad, and Chennai, totaling 56 buildings.
From FY20 to FY24, Mindspace saw an 11% CAGR in revenue, with net income increasing by 3% CAGR. In FY24, the company experienced a 7% YoY growth in sales and an 82.1% increase in net income. The company achieved its highest ever quarterly leasing in the March 2024 quarter, with a cumulative leasing of 3.6 million square feet for the year. The committed occupancy rate stood at 90.6% (excluding Pocharam), with a re-leasing spread of 17% on re-leased areas.
Looking ahead, Mindspace anticipates increased occupancy levels and healthy leasing activity in FY25, with developments expected to generate approximately Rs. 8 billion in rentals over the next three to four years. The company plans to designate Special Economic Zone (SEZ) spaces to boost Net Operating Income (NOI) and Distribution Per Unit (DPU) growth.
Embassy Office Parks REIT
Finally, we have Embassy Office Parks REIT, India’s first publicly listed REIT and Asia’s largest official REIT by area. 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 publicly traded units. The trust’s portfolio comprises commercial office space, hospitality, and renewable energy assets.
From FY20 to FY24, sales increased by a CAGR of 12%, while net income grew by 4.7%. FY24 marked a breakthrough year, with an 8% YoY increase in sales and an all-time high annual leasing total of 8.1 million square feet. The company achieved its occupancy guidance, reaching 85% on a portfolio level and 87% on a same-store basis, with Bangalore at 91% occupancy and Mumbai at 99%.
Looking ahead to FY25, the company expects NOI to grow 10% and DPU to increase by 7% YoY. Total leasing is projected to reach 5.4 million square feet, with portfolio occupancy expected at 89%. Contracted rent escalations are anticipated to be 13% on 7.7 million square feet of leases.
Conclusion
The real estate landscape, particularly in sectors such as co-working spaces, is undergoing a significant transformation driven by increased accessibility and evolving work dynamics. With demand projected to rise by 15-20% over the next two to three years, and potentially higher if macroeconomic conditions remain stable, investors are presented with promising opportunities.
However, given the relative newness of REITs and the co-working industry in India, prudent evaluation of companies is essential before committing funds. As these sectors mature and adapt to changing workplace preferences, strategic investment decisions will be crucial for aligning with market growth and maximizing returns.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
