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Brookfield India REIT (BIRET) portfolio has been impacted by dislocations in the commercial real estate market (uncertainty regarding DESH Bill, Covid induced work from home and build-up in supply over the past 2 years on account of lower leasing) however our recent management interactions / site visits indicate early signs of reversals. The key monitorable over here remains the physical occupancy which has inched upwards to 50% (8% in Jan’22; steady increase in all months) and is likely to head towards 60% by year end. Secondly, clarity with regards to SEZ area and DESH Bill is expected by mid-4QFY23 which is likely to drive leasing in SEZ area. Thirdly, tenant expansions plans which were on-hold, are firming up and BIRET assets remain a preferred choice in the respective micro-markets. Presently, BIRET has a NDCF guidance of INR 20.25 per unit for FY23 (INR 10.2 achieved in 1HFY23) and remains on track to meet it. A possible equity dilution to fund purchase of 6.4msf of completed assets remains an optionality. We maintain BUY rating with a Sep’23 TP of INR 340 (24% total return potential). At the current juncture, risk-reward looks favourable to us. Key risks: Slow pickup across commercial markets.

All eyes on DESH Bill: The Development of Enterprise and Service Hubs (DESH) Bill, which when passed by Parliament will replace the Special Economic Zones Act (SEZ) law of 2005, is likely to be introduced in the winter session. The bill, if cleared, SEZ units will be allowed to cater to domestic as well as international markets. Companies are waiting for more clarity before committing to office space. Rental differential in SEZ and non-SEZ areas are expected to bridge further benefitting Brookfield portfolio.

Large technology companies yet to fully return to office: Large technology companies are yet to start calling employees back to office in an aggressive manner while finance and other sectors are reporting higher physical occupancies. There is an inherent risk of employee resignations if they start suddenly start calling back all employees. Our site visits across Noida N1 and N2 assets saw over 50%+ workforce working from offices. As far as de-densification plans are concerned average desk space per employee is likely to remain at pre-Covid levels but tenants are exploring options to provide more open spaces resulting in requirements of more overall space.

7%+ distribution yield indicates favourable risk reward: BIRET trades at 7.0% / 7.2% FY23E / FY24E distribution yields while Embassy trades at 6.4% / 7.2% (BBRG) and Mindspace at 5.7% / 6.4% (JMFe). The taxation remains more favourable in Mindspace (93% of distributions non-taxable) and Embassy (84%) while Brookfield has 52% but from an institutional perspective (tax benefits) post-tax yield seems attractive.

Optionality of asset acquisitions: BIRET plans to acquire two assets i) Gurgaon G1 (3.7msf; 76% committed occupancy; INR 73psf in-place rent) and ii) Downtown Powai (2.7msf; 88% committed occupancy; INR 158psf in-place rent) and an equity raise seems likely. A large equity issuance can further increase the non-taxable component of NDCF

Maintain ‘BUY with a Sep’23 TP of 340: At the current juncture, risk-reward looks favourable to us and the possible acquisition / leasing traction remain key monitorables.

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