With return to office, real estate investment trusts expected to do well
Recent trends indicate that pure-play commercial (office) leasing stocks, represented by REITs, could be making a comeback after having lagged real estate stocks that rallied because of robust bookings in the residential market, reports Ram Prasad Sahu.
Real estate investment trusts or REITs are expected to gain traction among investors as people return to office.
Recent trends indicate that pure-play commercial (office) leasing stocks, represented by REITs, could be making a comeback after having lagged real estate stocks that rallied because of robust bookings in the residential market.
Real estate consultancy Cushman and Wakefield says net absorption of Grade A properties across the top eight cities stood at 9.5 million square feet in the December quarter, a twofold sequential increase and the highest in the last nine quarters.
IIFL Securities’ Mohit Agrawal says gross leasing for listed REITs was higher sequentially and there was a healthy mix of re-leasing, new leases, and early renewals. Calendar year 2022 (CY22) renewals are expected to rise 20 per cent year-on-year, taking them near CY18 levels.
Most brokerages believe occupancy, which declined during Covid waves, have likely bottomed out. Vacancy across REITs had risen by 500-900 basis points (bps) between March 2020 and December 2021.
Though occupancy levels rose during the recent quarter, the spread of the Omicron virus halted the trend.
Says Adhidev Chattopadhyay of ICICI Securities, “While the Omicron surge has temporality delayed the recovery by a quarter, we expect this trend to reverse from Q1FY23 with the improved pace of vaccinations, select corporates recalling employees to offices, and gradual pickup in international travel.”
Experts expect net absorption to rise from 20 million square feet in both CY20 and CY21 to 26.8 million square feet in CY22 and 30 million square feet in CY23 on the back of robust recruitment by top IT companies. About 40 per cent of office leasing demand is accounted for by the software and software-enabled services space.
New enquiries and expansion plans of REITs have also improved. Requests for proposals or new enquiries are increasing with Puneet Gulati and Akshay Malhotra of HSBC Global Research estimating it at 25 million square feet, with the biggest portion in Bengaluru, followed by Hyderabad.
“Many tenants are requesting early renewal, which allows them to benefit from better deal terms, and landlords have improved visibility on renewals for the upcoming year,” they say.
The other trigger is the announcement of fresh capex by developers in the office segment. IIFL Research says Embassy Office Parks REIT (Embassy) has initiated construction in the ETV asset in Bengaluru, while Mindspace REIT is looking at fresh capex in Hyderabad. DLF has also seen a strong pre-leasing trend in under construction assets.
Given the triggers, HSBC Global Research believes REITs offer an opportunity to participate in the return-to-office trade. What should help is that REITs continue to reduce cost of debt while maintaining low leverage and disciplined distributions.
They estimate Embassy and Brookfield India REIT to offer distribution yields of 5.7 per cent and 7.1 per cent respectively in FY22 with an opportunity for increased distributions.
IIFL Research has an ‘add’ rating on Mindspace Business Parks REIT and expects distribution yield of 5.3 per cent in FY22.
Investors have to be wary of a fresh wave of Covid, and the rise in interest rates is another negative for annuity models such as REITs.
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