Indian real estate investment trusts (REITs) have seen strong rental collections of over 99 percent over FY21-Q1FY23 and have been able to achieve healthy re-leasing spreads along with contractual escalations in spite of Covid disruptions delaying return to offices, a report by brokerage house ICICI Securities stated.
Of the three REITs listed in India, the brokerage has a 'buy' call on Embassy Office Parks REIT while having hold calls on the remaining two - Mindspace Business Parks REIT and Brookfield India REIT.
Embassy Office Parks REIT has given muted returns in the last 1 year, up 4 percent and has added 7 percent in 2022 YTD. Mindspace REIT has performed comparatively better, up 26 percent in the last 1 year and 13 percent in 2022 YTD. Brookfield India has delivered the best performance among the three, up 30 percent in the last 1 year and 13 percent in 2022 YTD. In comparison, Nifty Realty has risen 18 percent in the past 1 year.
About the REITs
The Brookfield India Real Estate Trust is India’s only institutionally managed public commercial real estate vehicle. Sponsored by an affiliate of Brookfield Asset Management, it has approximately $600 billion in assets under management, as of March 31, 2021. Its goal is to be the leading owner of a high-quality income-producing commercial real estate assets in key gateway Indian markets, which have significant barriers to entry.
Incorporated in 2014, Embassy Office Parks REIT owns, operates, and invests in real estate and related assets in India. The company operates through Commercial Offices, Hospitality, and Other segments. Its property portfolio comprises office parks and office buildings. The company also provides facility and room rental, maintenance, and financial leasing services.
Mindspace Business Parks REIT operates one of the largest Grade-A portfolios in India with a Total Leaseable Area of 29.5 million square feet (msf). Mindspace REIT's quality portfolio is located in four key office markets of India, namely Mumbai Region, Hyderabad, Pune and Chennai.
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, you will receive dividends on your investment in a REIT. 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. It is audited by professionals and most of the information is available openly.
Investment Rationale
According to ICICI Securities, the commentary from REIT managers and large office developers indicates that the fall in portfolio occupancies of 6-9 percent seen in FY21-22 owing to Covid has bottomed out and occupancies are expected to reach pre-Covid levels of over 90 percent by June 2023 quarter.
"While a rise in global interest rates and in India is the key risk, this also coincides with an acceleration in office leasing and we expect cap rates to remain in the 8-8.5 percent range or even lower for high-quality Grade A assets as market rentals have remained stagnant for 24 months and may see an upward trajectory considering that India offers affordable Grade A office rentals of $1 per sq ft per month," it noted.
While near-term distribution yields for Indian REITs over FY23-24E may appear low at 5-6 percent, ICICI Securities remain constructive on REITs as they provide a stable cash flow profile.
Indian REITs and large office developers such as DLF have seen strong rental collections of over 99 percent in FY21 and FY22 and have been able to achieve double-digit re-leasing spreads along with contractual escalations, highlighted the brokerage. Heading into FY23E, commentary from REIT managers indicates that incremental portfolio exits will be balanced by new leasing and many tenants retaining office space, it added.
Embassy Office Parks REIT: According to the brokerage, the portfolio vacancy level remaining flat QoQ at 87 percent and a fresh pre-commitment from JP Morgan for 0.55 msf of the additional area at Embassy Tech Village are key positives for the REIT.
Moreover, for the remainder of FY23, the REIT manager expects to renew another 1.0msf and another 0.8 msf of exits against which it expects to achieve fresh leasing of 1.2 msf, which implies an uptick in portfolio occupancy in FY23, it added.
The REIT manager also maintains its leasing guidance of 5.0 msf across renewals, new leasing and pre-commitments for FY23, which is another positive for this REIT, said the brokerage. However, a key monitorable is improvement in overall occupancy levels in the Manyata, Bengaluru asset which currently has an occupancy of 87 percent and the REIT manager expects occupancy to cross 90 percent in this asset by March 2023, it added.
Mindspace Business Parks REIT: The brokerage noted that the overall portfolio occupancy as of June 2022 was at 82.1 percent (flat QoQ) with committed occupancy at 85.6 percent.
For the remainder of FY23, the area scheduled for expiry stands at 1.1 msf, of which the REIT manager expects to re-lease at least 60 percent area and expects occupancy levels to cross 90 percent by end of FY23E or H1FY24 as inquiries from tenants have increased with larger spaces expected to see leasing traction over the next 12-18 months, said the brokerage.
Brookfield India REIT: While Q1FY23 saw minimal exits of 0.02 msf, for the remainder of FY23E, the REIT has scheduled expiries of 1.0 msf, noted the brokerage.
The REIT manager expects to achieve enough new leasing in FY23E to offset any FY23E exits considering the improved leasing outlook going ahead with 1.1 msf of ongoing leasing discussions and is targeting to cross committed portfolio occupancy of over 90 percent by Mar/Sep’23E vs. current levels of 83 percent, it pointed out.
