Here’s a bit of trivia. In which city did Toyota open its first showroom in India? A tough one to guess? Vinod Rohira knows the answer. The CEO of Mindspace Business Parks, the second real estate investment trust (REIT) to be listed in the country after Embassy Business Parks, had got the automaker to lease a space at its business park in Malad in 2000.

Today, Mindspace Business Parks REIT, sponsored by K. Raheja Corporation, has a presence across four key markets — Mumbai Region, Pune, Hyderabad, and Chennai (See: When geography matters). The debutant, perched at the 214th spot, is the only REIT in the Fortune India Next 500 list. The REIT’s 31.3-million-square-feet Grade-A office portfolios comprise five integrated business parks and five independent office assets. While Mindspace as a brand existed for a while, it became a REIT only in 2019. REITs own ready and leased assets, and pay regular dividends to investors. They are seen as an attractive investment vehicle since they offer a steady cash flow and favourable dividend yields.

Having spent over two decades with one of Mumbai’s most reputed real estate companies, Rohira knows the nuances of the business like none other. “I have been fortunate to learn and have the freedom to work as an entrepreneur. I have learnt in all these years that you need to be strategically conservative as real estate in India is akin to dancing on a minefield — one wrong mistake can set you back by five years or more,” says Rohira.

The Early Mover

The K. Raheja group was the earliest to identify the potential of business parks when it built the first organised suburban business park in Mumbai’s Malad in 2000. “Back then Nariman Point was the only CBD to talk about and Bengaluru (then Bangalore) was the upcoming hotspot. We could have gone in for a mix of small offices and residential spaces, but we took it up as an opportunity to attract top global financial institutions that were running Bangalore to set up their support services since the talent for financial services was in Mumbai,” recalls Rohira.

But Rahejas did not have to hardsell since economics was the clear winner. For instance, back in 2000, Mumbai still had strong last-mile connectivity — optic fibre cable versus copper wire in Bengaluru. The cost of bandwidth for the 2 Mbps line was far cheaper at $5,000 per month cvs $30,000-40,000 in Bengaluru, power cost ₹6 a unit against ₹9 for Bengaluru, with four hours of outage. If one added the cost of diesel generators, the power cost jacked up to ₹15 a unit. The other big expense was travel cost — transporting employees in Mumbai worked out to ₹900-1,000 per employee vs ₹1,000 in Bengaluru. “We used to tell clients don’t pay us any rental, just pay us what you are paying in utility costs in Bengaluru, optic fibre, and public transport. After that they never argued, they paid us ₹30 per square foot [psf] and took up the space,” recalls Rohira.

While cost economics helped seal the deals, Rahejas also went to lengths to convince clients that they were serious about what was being built. For instance, a team from Mindspace travelled to Chicago to learn the design specs of Merrill Lynch. “We were very clear that we wanted to create a gated community for financial players who were contemplating Bengaluru,” says Rohira. While Citibank walked in as the first client, the likes of JP Morgan, Merrill Lynch, and Bank of America soon trooped in —putting Malad on the global offshoring map.

A New Play

But beginning 2005, Mumbai lost out on commercial with residential taking centrestage. “Everyone in the city went in for residential as with the advent of FSI, land prices went up. The maths of leasing at ₹50 psf versus ₹10,000 psf in residential didn’t make sense,” says Rohira, Soon, Mindspace branched out from Mumbai to Pune, Hyderabad and Chennai. “Wherever the location was right and the geopolitical environment around was creating a good infra, we took that opportunity and moved there,” explains Rohira.

In fact, had it not been for Chandrababu’s pitch to the Rahejas in Mumbai, Mindspace would not have ventured into the-then undivided Andhra Pradesh. “We were scouting for land opportunities in Bengaluru where we met land owners who wanted to give their land, had a cost in mind and suggested what had to be built. But then Naidu came down to our office and said ‘we will give land free. Tell me what infra you want and I will build and deliver it’,” recalls Rohira.

That pitch worked. Today, Hyderabad accounts for 43% (₹551 crore) of 9-month FY22 revenues of ₹1,284 crore, Pune accounts for 20% (₹253 crore), Mumbai region accounts for 37% (₹472 crore). While 40% of its 31 million square feet is spread across Mumbai, Hyderabad accounts for 40%, Pune chips in with 13% and the rest is from Chennai. In comparison, Embassy’s office portfolio is concentrated (74%) in Bengaluru, a market where Mindspace still doesn’t have a presence.

It’s also a massive learning for Mindspace as 50% of the business is built to suit. ”Every five years, we have seen what clients want as a change and fortunately since we own the assets, we can retrofit, renovate and bring them to speed, and change the experience quotient for our tenants. The quality of experience is important as rent doesn’t matter at all,” explains Rohira, Not surprising that 79% of rentals come from multinationals, including Accenture, Nvidia, Amazon, Qualcomm and Verizon, with top 10 tenants accounting for 37% of its rentals (See: The A list)

But the true test of its mettle came when Mindspace went ahead with its public float in August 2020, right in the middle of the pandemic. While the big plus for REITs came from the rollback of the dividend distribution tax, Covid-19 proved to be ominous. But the Rahejas had eager bankers knocking on their doors. “We did some Zoom calls with global investors to understand their mindset and view on real estate. They wanted us to do the REIT as they felt India had a far greater opportunity in the digital supercycle,” points out Rohira.

The confidence was reflected in the issue which was oversubscribed 16 times at the peak of the pandemic. At its current price of ₹355, the REIT continues to trade at a premium to its issue price of ₹275, compared to Embassy Parks’ REIT, which trades at ₹381 to its IPO price of ₹300. In fact, though Embassy’s REIT came in 2019, it was subscribed just 2.58 times. The REIT is now trading at ₹381, a premium of 27% compared with 29% for Mindspace.

FY22 is the first full fiscal for the listed entity and despite concerns around work from home impacting demand for commercial spaces, the company has seen a significant uptick in leasing activity, with around 1.8 million square feet of space leased out in the December quarter, taking the overall leasing to around 3.8 million square feet in the first nine months of the current fiscal.

Since Q3FY21, Mindspace has given ₹23.43/unit as dividend to investors and based on 9-month FY22 payout, the annualised distribution yield works out to 6.7%. “If I have to grow I have to raise equity from time to time, and for that I have to deliver returns. It’s a cycle, I have to make sure that cash flow efficiencies are there on a quarter-on-quarter basis. I have to manage these over a 9-year cycle where you establish yourself, by then the ecosystem of the asset becomes strong,” explains Rohira. For instance, when Accenture first took Mindspace’s Airoli park it was leased at ₹28-29, while the current rate is ₹60. “It’s all about building the right asset and attracting the right customers, then you are in the game,” believes Rohira.

Currently, 85% of the REIT’s property is fetching rent and the balance is expected to yield rentals in the coming quarters. Close to 2 million square feet of property is under construction. The REIT has the option of either buying assets from its sponsor under ROFO (right of first offer) or buying third-party assets.

The company is waiting for the SEZ legislation to come through to unlock some of the special economic zones in its portfolio. “The budget’s impetus of replacing the SEZ policy will provide a fillip to the demand for SEZ spaces in our portfolio,” says Rohira.

In the nine months of the current fiscal, revenues have already crossed FY21’s number of ₹1,160 crore. Not surprising that Rohira sounds nonchalant about any emerging risks.

“At the peak of the pandemic we managed to raise money. So, honestly, I don’t see any ominous signs. We just need to be careful of what we build and deliver,” he sums up.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.