The stocks of listed real estate investment trusts (REITs) have fallen 9-12 percent from their peak in January to their low earlier this month. In addition to the negative sentiment as a consequence of changes announced in the Union Budget 2023-24 concerning tax treatment for debt repayment distribution, concerns about hiring slowdown and its leasing impact, as well as higher interest rates, could blight the sector in the near term, noted a report by Business Standard.
According to the report, what is exacerbating uncertainty for the sector is the delay in the clearance of the Development of Enterprises and Services Hub (DESH) Bill, which will replace the Special Economic Zones (SEZs) Act.
The report stated that occupancy levels in the October-December quarter (third quarter, or Q3) of 2022-23 (FY23) have been stable or have marginally improved for companies. The largest listed player - Embassy Office Parks REIT (Embassy) - reported fresh leasing and renewals in Q3 and superior occupancy levels, notwithstanding higher-than-expected exits. Mindspace Business Parks REIT (Mindspace) also saw a healthy quarter, led by steady leasing momentum and lower expiries, further informed the report.
While this is encouraging, interest costs are expected to move up, bearing in mind the higher cost of debt, cautioned BS.
Mindspace indicated that 2 msf of projects (Airoli and Pune) will be completed over FY23 and will add ₹150 crore of rental income over 2023-24 (FY24). However, an increase in interest cost by 50-75 basis points over the next few quarters and normalisation of excess debt drawdown could largely offset the same, says IIFL Research.
Similarly for Embassy, which has ₹4,100 crore of fixed cost debt maturing in the second half of FY24, the same will be refinanced at higher rates, compared to the current weighted average rate of 6.6 percent. The increased cost of debt due to refinancing is likely to impact the company’s FY24 estimated net distributable cash flows by minus 4 percent, noted BS.
The absence of clarity on the interpretation of changes announced in the Budget is also bearing down on sentiment.
Given the multiple near-term headwinds faced by REITs, investors should await clarity on regulatory issues and an improvement in hiring trends before considering the listed stocks in the space which offer a combination of steady yields and long-term appreciation, said BS.