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ICICI Securities is bullish on listed REITs citing some revival in demand for office space from October onwards. The brokerage firm has a ‘Buy’ rating on Embassy Office Parks REIT and Brookfield India REIT. However, it has an ‘Add’ rating on Mindspace Business Parks REIT.
In its report published on May 26, ICICI Securities said that domestic REITs saw strong rental collections of over 99% in FY21 and were able to achieve double-digit re-leasing spreads along with contractual escalations.
“However, overall portfolio occupancy levels declined by 4-6% owing to continued work-from-home and second Covid wave leading to deferment of leasing decisions by occupiers. Heading into FY22E, vacancy levels may rise further in H1FY22 but we expect this trend to reverse from H2FY22E assuming that vaccinations pick up accompanied by a gradual return to offices,” the brokerage said.
Shares of Embassy Office Parks REIT and Embassy Office Parks REIT have plunged 5% and 12, respectively, on a year-to-date basis until May 27, while the benchmark BSE Sensex has gained 7% during the same period. Recently listed, Brookfield India REIT has also declined 7% since listing in February 2021.
Outlook
REITs are corporations that manage the portfolios of high-value real estate properties and mortgages.
Factoring in incremental vacancy levels rising by 2-3% in FY22E, ICICI Securities expects the three real estate investment trusts to offer distribution yields of 7-9% over FY22-23E along with 13-18% capital appreciation as per current target prices.
While the Mindspace REIT is already distributing over 90% of returns in the form of tax-free dividends, the Embassy and Brookfield REITs have also announced measures to improve the tax-free share of dividend plus capital return for investors.
Positives
While near-term news flow may be negative, the Indian office market retains many positives such as the limited number of 8-10 pan-India developers capable of building quality rental assets.
“India remains one of the more affordable office markets in the world, with average rentals for Grade A office markets in peripheral/suburban micro-markets hovering around Rs 70-75 psf/month. India also leads in STEM (Science, Technology, Engineering, Mathematics) talent for technology assignments with over 2 million students graduating each year,” the brokerage highlighted.
“While a rise in global interest rates is the key risk, cumulative potential returns of 20-25% provides adequate valuation cushion,” ICICI Securities said.