Brokerage house JM Financial has initiated coverage on the Indian office REITs or real estate investment trusts, with a constructive outlook as they provide stable cash flows with 6-8 percent distribution yields. Among the 3 listed REITs, the brokerage’s preferred pick is Embassy REIT, as it derives maximum value from Bengaluru, India’s largest office market.
“The office real estate market faces significant economic and regulatory headwinds. Asset owners are contending with a slowdown in demand for office spaces due to slower hiring and structural challenges led by the hybrid work model, increasing interest rates, and higher vacancies in SEZ assets. However, we expect a reversal in fortunes for the sector starting FY25E. The broader premise of India being the leading outsourcing destination is still on strong ground, the interest rate cycle is possibly peaking out, clarity on SEZ de-notification is expected by this year’s end (DESH Bill) and there should be a gradual uptick in hiring activity by the IT/ITES sector,” explained the brokerage.
It further pointed out that the performance of the listed REITs has been stable with occupancies having bottomed out and rental growth majorly coming through annual built-in escalations. Despite the tough demand situation, gross leasing for them has been healthy, it added.
Certain micro-markets like the Sarjapur-ORR corridor in Bengaluru, Madhapur-HITEC City in Hyderabad, and the Magarpatta-Kharadi belt in Pune should continue to outperform, as they remain the first preference for all Grade-A and MNC occupiers. Embassy and Mindspace have a presence in these markets and should benefit from the same, noted the brokerage.
It also highlighted that India is one of the fastest-growing large economies in the world and is expected to outpace other large economies in the next 3-5 years. As India’s GDP grows, the demand for office space from domestic corporates should also grow in tandem, believes the brokerage.
What are REITs?
A REIT is an investment trust that owns, operates, and finances real estate with the main aim of generating income. It manages a portfolio of real estate assets that are high value and generate steep rent and leases. REITs generally look for large as well as small investors who want to park their money in real estate without having to buy or manage the property themselves. These investors then receive dividends which are basically the rent or lease that is divided amongst themselves.
REITs are good investment instruments for investors looking for a steady dividend since once in at least every six months, they receive dividends. Over a long period of time, it also sees stable capital appreciation. Also, since these are regulated by Sebi, REITs have higher transparency than regular real estate deals. Professionals audit it and most of the information is available openly.
Individual REITs
The brokerage has a ‘buy’ call all 3 REITs – Embassy Office Parks REIT, Brookfield India REIT and Mindspace Business Parks REIT with up to 16 percent upside potential. However, Embassy REIT is JM’s most preferred pick.
Embassy Office Parks REIT has given negative returns in the last 1 year, down over 10 percent, and has also fallen 8.5 percent in 2023 YTD, giving negative returns in 6 of the 10 months in the current calendar year. Despite the decline, it was the best-performing REIT between the 3 in the last 1 year.
Meanwhile, Brookfield India has fallen the most among the three, down 24 percent in the last 1 year and 14 percent in 2023 YTD. It has given negative returns in 7 of the 10 months so far in the current calendar year.
Finally, Mindspace REIT has shed 16 percent in the last 1 year and 7 percent in 2023 YTD, giving negative returns in 6 of the 10 months of 2023.
In comparison, Nifty Realty has risen over 45 percent in the past 1 year and over 41 percent in 2023 YTD.
Embassy Office Parks REIT: The brokerage is bullish on the stock with a target price of ₹340, indicating an upside of almost 11 percent.
The growth drivers for Embassy are an expansion of operational area (6.9msf to be commissioned by FY26E), contractual rent escalations (12-15 percent increases every 3 years), reversion of rentals to market levels (11-29 percent higher), and lease-up of vacant offices, said the brokerage.
Embassy Office Parks REIT owns Asia’s largest office portfolio on a leasable area basis, which is currently at 45.0msf (34.3msf operational, development pipeline of 7.9msf & 2.8msf of forthcoming projects). Its office assets are majorly located in the high absorption office markets of India. It has a quality portfolio: nearly half of its tenants are Fortune 500 companies (47 percent), 81 percent are MNCs and the weighted average lease expiry (WALE) is 6.6 years, noted JM.
The portfolio growth builds reliably from lease-up of vacant areas, contractual escalations, MTM rental revisions and new developments. It expects net operating income (NOI) to accumulate at 10.9 percent CAGR over FY23-26E.
Brookfield India Real Estate Trust: The brokerage has a ‘buy’ call on the stock with a target price of ₹280, implying an upside of over 16 percent.
“With improving physical occupancy at all offices and strong hiring across IT/services/captives over the past 18 months, demand for office space should recover eventually. We estimate BIRET’s portfolio-wide occupancy to go to 90 percent by FY26E from 83 percent as of the end of FY23. BIRET has always enjoyed high occupancy (peak of 96 percent in FY20) before Covid-19. Accordingly, we estimate Gross Rentals/Distribution per Unit to grow at FY24-FY26E CAGR of 5.8 percent/4.9 percent,” it forecasts.
Brookfield India REIT (BIRET) is India’s first and only 100% institutionally managed REIT, owning 25.2msf (operational area: 20.6msf, under construction: 0.7msf and future development: 3.9msf) of Grade-A office properties located across the key markets in India. It is backed by Brookfield Asset Management (BAM), one of the world’s largest asset managers, which has more than $260 billion in real estate assets under management (AUM).
Mindspace Business Parks REIT: The brokerage is bullish on the REIT with a target price of ₹345, indicating an upside of 11 percent.
While a higher Weighted Average Lease Expiry or WALE provides stability to rental income, the brokerage could see possible rent surprises/ catch-up in certain assets over the medium to long term for Mindspace. It expects occupancies to be steady, even as 1.5msf of area gets completed in the next 2 years. NOI (net operating income) margins will also be stable, as in the recent past. It estimates Rentals/NOI FY23-FY26E CAGR of 9.6 percent/10.1 percent respectively.
Mindspace Business Parks REIT (Mindspace) is one of India’s largest commercial office portfolios with a dominant position in Hyderabad. Mindspace owns a 32.0msf (25.9msf completed & operational) portfolio that is currently tracking an occupancy of 86.9 percent and a WALE of 6.9 years. It has a diverse portfolio of marquee tenants with 75 percent attributable to multinational corporations and 31 percent to Fortune 500 companies.
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