Reiterate ‘buy’ on Embassy REIT, Oberoi Realty, DLF

REITs have emerged as a potent asset monetisation tool. With three REIT listings in India, the door has opened for more potential REIT listings from FY22E onwards.

Along expected lines, the Indian Commercial Real Estate (CRE) office market has seen a 47% YoY decline in Q1CY21 (January-March’21) net absorption at 3.6msf. While green shoots were emerging in January’21 with a pickup 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 now expect a leasing pickup towards the end of September’21 vs. July’21 earlier and the current trend of occupiers downsizing and delaying new leasing decisions to continue in the near-term.

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

Office leasing recovery may pick up towards the end of Q3CY21. While CY20 was a weak year with 20msf of net absorption owing to Covid impact, we expect net absorption to gradually improve and build in net absorption of 24.3msf in CY21E and 29.8msf in CY22E. We expect leasing activity to pick up from September’21 as international travel may pick up again along with effective Covid vaccines.

We believe that cumulative net office absorption of 80msf over the next years (CY21-23E) compares well with overall upcoming Grade A supply of 117msf over the same period of which 20-30% may be shelved, leading to effective supply of 80-85msf.

REITs have emerged as a potent asset monetisation tool. With three REIT listings in India, the door has opened for more potential REIT listings from FY22E onwards.

With India having 488msf of occupied Grade A office stock as of March 2021 and global institutional investors continuing to invest in annuity assets, we expect more REIT listings over the next 2-3 years. Developers in our coverage universe such as DLF, Phoenix Mills and Oberoi Realty have already highlighted their medium-term plans to consider a REIT listing.

Further, large annuity portfolio buyouts in FY21 such as Blackstone buying out Prestige Estates’ office and mall assets and Brookfield’s acquisition of RMZ’s office portfolio points to consolidation in favour of institutional landlords for annuity assets.