Are REIT’s results echoing the revival of the office leasing market?

In a nutshell

Q2 FY22 results of the 3 listed office REITs show early signs of the office sector stabilizing after a severe covid-19 induced disruption in 2020

India’s first REIT (Real Estate Investment Trust) debuted in 2019 and since then two more REITs have listed. All three are backed by strong sponsors and / or marquee global investors. Between them, they own ~67MM sf of operational Grade A office portfolio across the top 6 markets. Their operational performance is a good barometer for the health of the broader office sector. 

Key highlights from the results:

What are the trends we are seeing?

  • Occupancies are stabilizing and demand is improving: Active RFPs (tenants looking for space currently) stood at ~26MM sf
  • Bangalore is seeing strong demand: Accounts for 56% (~14.6MM sf) of the total active RFPs
  • Market rentals remain stable with an increasing bias in few markets like Bangalore; clients are signing up to mark-to-market escalations
  • Institutional investors continue to keep faith in the sector – private equity investments of INR11,000 Cr+ in first 9 months of 2021; on the public side, Embassy REIT raised (QIP and secondary sale by one of the Sponsors) INR5,700 Cr+ in the last 12 months
  • There is consolidation towards well-managed, better quality offices – which benefit the REIT portfolios and other high quality Grade A offices
  • Fundamentals of the tech enabled offshoring business remain strong – Hiring levels at IT companies (proxy for office space demand) was 2x of the previous 5 year average in FY22
  • While current physical occupancies are low, most tenants have announced back-to-office plans driven by high vaccination and lower infection rates

What does the future look like?

We expect office markets to bottom out over the course of next 3-4 quarters – function of demand recovery (improving Indian economy and global tech trends) and delayed supply of new office space (supply discipline from larger players). We continue to have a positive view on the sector over the medium term with a selective/cautious approach to investments in the sector given near term uncertainties.

Source Name: Certus Capital

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