IGI Logo

Commercial Real Estate: Awaiting a recovery

Along expected lines, the Indian Commercial Real Estate (CRE) office market has seen a 32% YoY decline in H1CY21 (Jan-Jun’21) net absorption at 7.2msf. While green shoots were emerging in Jan’21 with a pick-up in leasing enquiries and large pre-leasing transactions, the second Covid wave in India may lead to a delayed recovery for the office market.

We expect a leasing pickup towards the end of Sep’21 driven by improved pace of vaccinations, select corporates recalling employees to offices while the current trend of occupiers downsizing and delaying new leasing decisions may continue in the near-term.

However, we remain positive about the long-term resilience of the Indian office market, with a limited number of 8-10 large pan-India office developers, India having affordable rentals of under 1 USD/psf/month and an abundance of STEM talent. We remain bullish on office asset developers and reiterate our positive stance on DLF, Embassy REIT, Brookfield India REIT and Brigade Enterprises.

* Lease expiries the key monitorable in FY22E:

Post the onset of the first Covid wave in India from Mar’20 (Q1CY20), pan-India Grade A vacancy levels across India's top 7 cities have risen by over 300bps till June’21 (Q2CY21) to 16.6%. In line with industry trends, there has been a rise in portfolio vacancy levels by 4-6% on like-to-like basis for Embassy REIT, Mindspace REIT and DLF in FY21 while Brookfield REIT retained flattish occupancy levels in H2FY21. This was owing to exits by tenants for scheduled expiries and early exits as well. Heading into FY22E, the second Covid wave may lead to further rise in vacancy levels of 200-300bps in H1FY22. However, we expect this trend to reverse from H2FY22E assuming that vaccinations pick up accompanied by a gradual return to offices and possible pick up in international travel.

* REITs offer attractive yields of 6-8% over FY22-23E:

We have factored in a fall in occupancy levels of 2-3% for the REITs in H1FY22E but expect the same to reverse from H2FY22E onwards heading into FY23E. We expect the three REITs to offer distribution yields of 6-8% over FY22-23E along with 12-16% capital appreciation as per current target prices. While a rise in global interest rates is the key risk, cumulative potential returns of 18-24% provides adequate valuation cushion, in our view. We derive comfort from the fact that Indian REITs saw strong rental collections of over 99% in FY21 and were able to achieve double digit re-leasing spreads along with contractual escalations.

* Listed annuity players expected to weather the storm:

We expect annuity asset players to weather the storm even in an environment of delayed leasing decisions and 5-10% correction in rentals. We continue to reiterate our positive stance on players with a large office portfolio such as DLF (we model for DCCDL rental EBITDA of Rs35.6bn in FY22E and Rs40.7bn in FY23E and possible REIT listing ) and Brigade Enterprises (rental NOI to grow at 28% CAGR over FY21-23E to Rs4.8bn driven by leasing in Chennai/Bengaluru office projects).

* India’s long term advantages remain as a high-quality office hub:

While near-term news flow may be negative, our view is that the Indian office market retains many positives such as: 1) Limited number of 8-10 pan-India developers capable of building quality rental assets; 2) India remains one of the more affordable office markets in the world, with average rentals for Grade A office markets in peripheral/suburban micromarkets hovering around 1 USD/psf/month or Rs70-75/psf/month; 3) India leads in STEM (Science, Technology, Engineering, Mathematics) talent for technology assignments with over 2 million students graduating each year.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer