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

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.