(Oct 23): Sanjeev Dasgupta likes to point out that Ascendas India Trust has managed to keep its distributions per unit (DPUs) steady in Singapore dollar terms over the past decade despite a more than 40% depreciation in the Indian rupee.
“We’ve been able to mitigate the rupee’s decline with strong income growth through both-new development and acquisitions that have been quite accretive. In the last three years, we’ve grown our floor area by 48%,” says Dasgupta, CEO of Ascendas India Trust’s trustee-manager. “That’s how we’ve been able to make up for most of the depreciation.”
In addition, at least half of Ascendas India Trust’s loans are hedged at any one time to protect the trust’s net asset value. Currently, they are 70% hedged. The trust also books a forward cover, as it receives monthly income from its properties to protect its DPU, which is paid every six months. “That helps smoothen distributions if there are any interim [adverse] movements in the rupee in those six months,” Dasgupta says. “If the rupee depreciation is within a band of 4% to 5% we‘re quite comfortable because that is captured within our current hedging strategy.”
Since it was listed in 2007, Ascendas India Trust has focused on IT parks. These properties were really office space, and tied to the IT outsourcing story that has been a cornerstone of India’s growth. Currently, 93% of the trust’s net lettable space is occupied by MNCs. The remaining 7% is occupied by Indian companies. About 54% of the space is leased to companies in the IT and software development fields.
Now, Dasgupta is steering the trust towards logistics properties, which are likely to be beneficiaries of fast-growing domestic consumer demand as well as key policies of Prime Minister Narendra Modi’s government, including the “Make in India” programme and the new goods and services tax (GST), which was launched on July 1.
Tax reform greases logistics
The implementation of GST has removed the need for state border taxes in India, which slowed down the transportation of goods and led to delay at state border crossings. Since the GST was introduced, 22 out of 29 Indian states have removed state border taxes.
“Earlier, [consumer goods companies] were operating from small warehouses at state borders. This used to slow down the movement of goods because trucks would typically have to stop at the state borders to deal with tax issues,” Dasgupta says. The removal of state border taxes could now shave 20% to 25% off transportation time, according to some studies. As a result, consumer goods companies are consolidating their distribution activities into larger and more sophisticated warehouses.
Ascendas India Trust is now quickly moving into this field. Earlier this year, it said it had signed a term sheet with Arshiya for the proposed acquisition of operating warehouses in Panvel, near Mumbai. The properties are six income-producing warehouses with a total floor area of 832,000 sq ft. The total price tag will be $115 million, comprising an upfront payment of $94.3 million and a deferred payment of $21.7 million over four years, contingent upon Arshiya’s achieving business plan milestones. “It will be an accretive transaction,” Dasgupta says.
Mumbai is not only one of India’s largest cities with a relatively wealthy population but also a major transport hub. India’s biggest container port, the Jawaharlal Nehru Port Trust (JNPT), which handles 55% of all of India’s TEUs, operates from the outskirts of Mumbai. “This is an opportune time for us to play a key role in this sector,” Dasgupta says. “Unlike our IT business parks, which are driven by services and the export sector, it is driven by domestic consumption. So, it has very different economic cycles, which is good.”
Meanwhile, Modi’s “Make in India” programme is attracting manufacturing investment from MNCs. That is creating an opportunity for Ascendas India Trust to expand into other forms of industrial properties. “Rather than setting up their own manufacturing and storage facilities, they are quite happy if someone else sets up readybuilt factories and warehouses they can operate from,” says Dasgupta, referring to the MNCs coming to India.
India is also increasingly seen as a fertile growth market for e-commerce players such as Flipkart, Amazon.com and Alibaba Group Holding. Alibaba recently acquired a 36.3% stake in an Indian e-payments gateway, Paytm E-commerce. And, the phasing-out of the 500 rupee and 1,000 rupee notes earlier this year to stamp out corruption is said to have pushed more people into the banking system and given electronic payments a shot in the arm. The result of all this is an e-commerce boom of sorts, according to Dasgupta. “The e-commerce sales growth for [this year’s] Deepavali is very, very strong. Its growth was in triple digits.”
In June, Ascendas India Trust’s sponsor and major shareholder Ascendas-Singbridge formed a joint venture with Indian property company Firstspace Realty to develop logistics properties to serve third-party logistics operators, e-commerce players, automobile makers, fast-moving consumer goods companies and modern retailers and manufacturers. According to Dasgupta, the joint venture has just acquired a 125-acre site in Chennai. “As they build more assets, that’s a potential pipeline for us.”
Steady growth
Even as Ascendas India Trust moves to tap these new growth areas, it is still building up the revenues from its current portfolio. Altogether, it owns seven properties in four cities. Its most recent acquisition took place in February, when it bought BlueRidge Phase 2 in Pune. The property was only 55%-committed when Ascendas India Trust bought it, but this figure has since increased to more than 60%.
“The valuation we paid factored in the discount for the occupancy, and the occupancy is growing quite well. We’ve leased out quite a bit of incremental space. Financially, this is proving to be a pretty good investment for us,” Dasgupta says. Its tenants include a unit of Dell, Accenture and Tata Technologies.
Ascendas India Trust tries to get tenants that are willing to sign long-term leases, and it eschews any form of financial engineering when it makes acquisitions. “We have not been innovative with income support,” Dasgupta remarks. “Ours are third-party leases negotiated at arm’s length. Our preference is to have long-term leases. [Our] tenants invest a lot in the electronics infrastructure, networking and computing capabilities. It’s quite important [for them] to be in the location for a longer period to recover those costs.”
The trust’s IT park assets have net property income yields of 9.75% as at Mar 31. Logistics property assets currently have higher yields, but the sector is drawing a lot of investment at the moment, which could drive the yields down. In May, the Canada Pension Plan Investment Board and IndoSpace, India’s largest developer of modern industrial and logistics real estate, announced the formation of a US$500 million ($678 million) fund to acquire 13 industrial and logistics parks totalling about 14 million sq ft. It has an option to acquire an additional 11 million sq ft valued at US$700 million. The deal was believed to have been done at an NPI yield of 8.5%.
“We are very conservative with our acquisition strategy. Though Indian capitalisation rates have seen huge compression, we’re not going to buy unless a deal is accretive. That’s why our shareholders have always liked us,” Dasgupta says. At any rate, Ascendas India Trust has its own development pipeline of some three million sq ft of gross floor area. Of this, 2.2 million sq ft is in Bangalore, 400,000 sq ft in Chennai and 400,000 sq ft in Hyderabad. Ascendas Land has 2.3 million sq ft in the pipeline for the trust as well.
Despite all the growth it has delivered, Ascendas India Trust has not tapped the market for equity much. Since its IPO, it has never had a rights issue. It has only done a placement once, in 2012, when it raised some $100 million. That placement reduced its debt-to-asset ratio to below 20%. Since then, the trust’s gearing has risen to about 30% currently.
Dasgupta says some form of equity raising may be necessary in future as the trust continues to grow. “It would be fair to say if we find a really good-quality acquisition that is accretive, we may raise equity.”
