Office space demand improvement, potential interest rate cuts to benefit REITs, says Nuvama; Embassy REIT top pick

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. While there are clouds on the consumption front in the near-term, it remains convinced that retail consumption is on a structural uptrend in India.

A potential interest rate cut over the next year should act as a re-rating trigger for REITs. The brokerage firm recommends a ‘Buy’ rating each on Embassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust and Nexus Select Trust.

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Mindspace REIT registered its best-ever quarterly gross leasing since IPO in Q4FY24, while Embassy REIT and Brookfield REIT had achieved this milestone in Q3FY24.

“Over the past couple of years, higher exits, predominantly from IT/ITeS companies had dragged net leasing into negative territory. While exits continued in Q4FY24, the pace seems to be moderating. Consequently, net leasing was positive for all office REITs. While occupancies improved during the quarter, management of all the office REITs were confident that occupancies should trend upwards from these levels in FY25 as well,” analysts at Nuvama Equities said.

Meanwhile, aided by healthy MTM, in-place rents have risen steadily for all the office REITs. Most REITs are currently in a portfolio expansion mode in order to benefit from improvement in demand.

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Consequently, the net debt/GAV is slowly rising; nevertheless, it remains below the regulatory cap of 49% for all REITs. With an increase in GAV in FY24, the net debt/GAV declined in Q4FY24. Moreover, increase in repo rates has led to a steady increase in interest rates for most office developers; despite that, all office REITs currently enjoy borrowing rates < 8.5%, the brokerage firm said.

Nuvama Equities has a ‘Buy’ rating on all these four listed REITs. Here are the target prices for these REITs.

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

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.