Indian Retail Estate Investment Trust (REIT) has seen a strong rental collection of over 99 percent in the first quarter of the financial year 2022 (Q1 FY22), though their overall vacancy levels have increased by 100-200 bps QoQ. Analysts believe the increase in vacancy levels is due to the continued work-from-home measures and the second wave of COVID-19 infections, leading to occupiers putting off leasing decisions.
Ever since the coronavirus outbreak hit the country in March 2020, the Grade A vacancy levels have risen by over 300 bps till June 2021. The vacancy levels have risen to 16.6 percent.
In line with these trends, portfolio vacancy levels have risen on the same basis for REITs. REITs that invest in Grade A properties are DLF, Mindspace Business Parks, Embassy Office Parks, and Brookfield India REIT. While the former three have seen vacancy levels rising by 400-600 bps in FY21, Brookfield has retained flattish occupancy levels in H2FY21.
The trend reversed slightly in Q1 FY22, while portfolio vacancy levels rose by 100-200 bps QoQ for Brookfield REIT, Mindspace, and DLF; levels remained flat for Embassy REIT.
"While vacancy levels may rise further in Q2FY22, we expect this trend to reverse from the second half (H2) of FY22 assuming the pickup in vaccinations is accompanied by a gradual return to offices," ICICI Securities said in a report.
REIT managers have indicated that leasing discussions that were on hold after the second wave have now been revived again. The existing occupants are talking about potential expansions, they said, and the tenants who were looking to surrender space earlier are now looking to retain and expand space.
REITs offer attractive yields
ICICI Securities expect the three listed REITs (Embassy, Mindspace, and Brookfield) to offer distribution yields of 6-9 percent over FY22-24E. While a rise in global interest rates is a key risk, it said, the cumulative returns of 20-24 percent can provide an adequate valuation cushion.
"We have factored in occupancy levels of 200-300 basis points for the REITs in FY22E. But we expect the same to reverse by Q3 FY22 with a full-fledged recovery from FY23E," it said.
"We expect the three REITs to offer distribution yields of 6-9 percent over FY22-24E along with 12-18 percent capital appreciation as per current target prices," ICICI Securities added.
(Edited by : Abhishek Jha)
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