- Office demand improvement which began from the second quarter of FY24, sustained in the current quarter as well. The office REITs also witnessed decent traction in gross leasing during the quarter.
- While occupancy for most REITs improved in the March quarter of FY24, further buoyancy is expected in FY25.
- Brokerage firm Nuvama Institutional Equities believes the office cycle has turned in India and office demand should improve going ahead.
Office space demand improvement, potential interest rate cuts to benefit REITs, says Nuvama; Embassy REIT top pick
Office Demand Continues to Strengthen
The improvement in office demand that began in the second quarter of FY24 has continued into the current quarter. Office REITs have seen significant traction in gross leasing during this period. Occupancy rates for most REITs improved in the March quarter of FY24, and further buoyancy is anticipated in FY25.
Brokerage Insights on Office Cycle
Brokerage firm Nuvama Institutional Equities has observed that the office cycle in India has turned, with expectations of continued improvement in office demand. Despite near-term concerns on the consumption front, the firm remains confident in the structural uptrend of retail consumption in India.
Interest Rate Cuts as a Potential Catalyst
A potential interest rate cut over the next year could serve as a re-rating trigger for REITs. Nuvama Institutional Equities recommends a ‘Buy’ rating on Embassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust, and Nexus Select Trust.
Performance of Key REITs
Mindspace REIT registered its best-ever quarterly gross leasing since its IPO in Q4FY24, while Embassy REIT and Brookfield REIT achieved similar milestones in Q3FY24. Despite higher exits from IT/ITeS companies in recent years, the pace of exits moderated in Q4FY24, resulting in positive net leasing for all office REITs. Occupancy rates improved during the quarter, and management of all office REITs are optimistic about further improvements in FY25.
Financial Metrics and Portfolio Expansion
Healthy mark-to-market (MTM) and steady increases in in-place rents have benefited all office REITs. Most REITs are currently expanding their portfolios to capitalize on the improving demand. Although net debt/GAV is rising, it remains below the regulatory cap of 49% for all REITs. With an increase in GAV in FY24, net debt/GAV declined in Q4FY24. Despite rising repo rates, office REITs continue to enjoy borrowing rates below 8.5%.
Target Prices and Recommendations
Nuvama Equities has issued a ‘Buy’ rating for the following REITs, along with their target prices:
Embassy Office Parks REIT | Buy | TP: ₹413
Mindspace Business Parks REIT | Buy | TP: ₹372
Brookfield India Real Estate Trust | Buy | TP: ₹280
Nexus Select Trust | Buy | TP: ₹146
Conclusion
The office demand improvement observed in FY24 is expected to continue into FY25, with potential interest rate cuts serving as a catalyst for further growth. Nuvama Institutional Equities remains optimistic about the future performance of key office REITs, recommending a ‘Buy’ rating for several prominent players in the market.
