Vacancy levels at 3 REITS set to rise another 300 bps

The vacancy levels at the three listed real estate investment trusts (REITS) — Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield REIT — could rise further in the second quarter (Q2) of 2021-22 (FY22) due to the pandemic, observed analysts.

The REITS have seen 100-200-basis point (bps) increase in their vacancy levels in Q1FY22 due to continued work from home and the second wave, leading to deferment of leasing decisions by occupiers, said Adhidev Chattopadhyay, vicepresident, equity research-real estate at ICICI Securities, in a report released on Thursday.

“Factoring in incremental vacancy levels rising 200-300 bps in the first half of FY22 and building in a recovery towards the end of the third quarter of FY22 , we expect the three REITS to offer distribution yields of 6-9 per cent over FY22-24, along with 12-18-per cent capital appreciation, according to our current target prices,” said Chattopadhyay.

After the onset of the first Covid wave in the country from March 2020 (Q1CY20), pan-indian Grade A vacancy levels across the country’s top seven cities have risen over 300 bps till June (Q1FY22) to 16.6 per cent. In line with the industry, portfolio vacancy levels had risen 400-600 bps on a same-store basis for Embassy REIT, Mindspace REIT, and DLF in 2020-21 (FY21), while Brookfield REIT retained flat occupancy levels in the second half of FY21, he said. “This was owing to exits by tenants for scheduled expiries and early exits as well. In Q1FY22, the overall portfolio vacancy levels increased further by 100-200 bps quarter-on-quarter on a same-store basis for Brookfield REIT, Mindspace REIT, and DLF, while Embassy REIT retained flat occupancy levels,” said Chattopadhyay.

Vinod Rohira, chief executive at Mindspace REIT, said it is business as usual for them. He said the REIT leased 3 million square (sq.) feet (ft) of space in the June quarter. “Since we are adding new space, it seems like vacancies are ballooning. There is enough demand in the market. It takes some time to lease a new space,” said Rohira, adding that the teams are doing good work in terms of leasing.

In a recent interview with Business Standard, Embassy Office Parks Deputy Chief Executive Officer Vikaash Khdloya said occupancy numbers may fall 100-200 bps in the coming quarters, but there will be no massive downside risk. Khdloya expects demand for office properties to bounce back by early FY22. Khdloya said the REIT expects office leasing of around 500,000 sq. ft every quarter in the next two to three quarters. The REIT leased 545,000 sq. ft in Q1FY22.