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We analysed the trends in commercial markets across seven major Indian cities as well as key micro-markets within each city (Source: Cushman and Wakefield) and found that: i) Overall vacancies were flat at 17.9% in 2QFY24 (17.9% in 1QFY23), and ii) Quoted rents were broadly steady across Grade A properties. Across the top 7 cities, 34msf of supply was delivered on an LTM basis (Exhibit 2) while net absorption was around c.33msf. Leasing activity is expected to get a further leg-up in the next 6-9 months on account of i) likely clarity on SEZ area (partial denotification and DESH Bill), ii) incremental work-from-office trends, and iii) India remaining the most favoured offshoring destination. We expect occupancy levels to improve slowly starting 2HFY25E and then gain momentum in FY26E. In our coverage universe, Mindspace REIT and Brookfield REIT both look attractive from a ‘total returns’ perspective.

? Vacancies bottomed out; demand remains healthy: We highlight that vacancies were flat at 17.9% in 2QFY24 (17.9% in 1QFY23; Exhibit 1) despite new supply of 34msf being delivered over the past 12 months (Exhibit 2). Demand remains healthy at c.33msf on a LTM basis; annual net absorption is, however, lower than supply.

? Stable occupancies at Bengaluru and Pune; supply glut impacting Hyderabad: Bengaluru and Pune are the most stable office markets in the country with the lowest vacancies at 11.4% and 10.5% respectively as of 2QFY24. Vacancy at Bengaluru has increased by 3.4ppt over 2QFY23 due to area addition of 10msf (+6% YoY) and net absorption of only 4msf during the same period. Vacancy levels at Pune have marginally declined over 2QFY23 (11.7%) as demand (5msf) was in line with supply (5msf; +8% YoY). Hyderabad, on the other hand, has seen massive supply (9msf LTM run-rate; +10% YoY) while demand remains at c. 7msf, resulting in vacancies inching upwards to 24% (14% in 1QFY22). However, within Hyderabad, the Madhapur micro-market (location of Mindspace REIT’s largest asset) has a vacancy of 14% (8% vacancy in Madhapur park), indicating a healthy trend for the existing REIT asset. We highlight the high vacancies across MMR / Delhi NCR / Kolkata of 20% / 24% / 25%, although a large part of this is in standalone and strata-sold buildings.

? Major REIT micro-markets stable QoQ: Excluding Madhapur, Hyderabad, vacancies at all other key REIT micro-markets (Thane Belapur (MMR), Outer Ring Road (Bengaluru) and Cyber City region (Gurgaon)) have largely been stable QoQ (Exhibit 33). As of 2QFY24, the REIT parks (excluding Embassy Manyata where 1msf was added in 2QFY24) have lower vacancies compared to their respective micro-markets. These assets are the preferred destinations for grade-A occupiers as they are large format office campuses, with Grade-A construction and ample amenities, delivering a superior occupier experience. This superior occupier experience works as a competitive advantage in favour of the REITs/Tier 1 landlords.

? Key takeaways from the conference: The consensus view amongst the major office owners (Embassy, Mindspace, Brookfield, Brigade and Prestige) was that expiries should decline, going forward, and occupancies should start inching upwards from 1QFY25, as net leasing turns positive. These elevated expiries were largely led by space rationalisation carried out (now largely complete) by IT/IeS companies. On the other hand, the three Indian office REITs have witnessed healthy leasing as global captive centres (GCCs) have emerged as a prominent driver for commercial office absorption. Across the three REITs, c. 75% of the vacancies are in the SEZ spaces and this will likely improve once the laws are amended to allow partial denotification of SEZs.

? Preferred picks: In our coverage universe, Mindspace REIT (BUY-rated with a Sep’24TP of INR 345; total return potential of 15%) and Brookfield REIT (BUY-rated with a Sep’24TP of INR 280; total return potential of 25%) look attractive from a ‘total returns’ perspective.

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