REITs expect leasing, occupancies to rise in future quarters

The first quarter of FY25 was marked by subdued leasing by real estate investment trusts (REITs), modest growth in distributions and continuing exits though rentals showed an upward trajectory. Occupancies as well as distribution per unit should rise in future with management commentaries indicating that the demand environment was improving, which could get a boost if there are rate cuts.

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All three office REITs and the one retail REIT are engaged in adding to their portfolios through strategic acquisitions from their sponsors or third parties and this has led to an increase in debt, though leverage is at manageable levels.

Gross leasing in the office REITs, which increased all through FY24 reaching a high of around 6.8 million square feet in the fourth quarter of last fiscal year, saw a sharp fall in the first quarter to 3.5 msf. A major reason for this is that non-SEZ spaces are almost fully leased out leaving very little for additional leasing.

The two larger REITs, Embassy REIT and Mindspace REIT, accounted for the bulk of the leasing in the quarter. However, tenant exits are still continuing, though they have moderated according to Nuvama Research. The net leasing during the quarter was negative for the two larger REITs.

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The impact of exits and falls in leasing has had its impact on occupancy levels which have been flat sequentially. However, all the REITs are optimistic about occupancy levels rising from here on.

Brookfield REIT has guided for exit occupancy of 87-89 per cent by March 2025, as it has a relatively low expiry load in FY25 with 0.6 msf of expected exits and 0.8 msf of expected renewals. Embassy REIT, which ended the June quarter with an occupancy of 85 per cent by area, has updated its occupancy guidance to 88 per cent by March 2025. Mindspace REIT expects its occupancy to be at 88 per cent from 83 per cent.

Rent growth has been healthy for the office REITs, with a more diversified tenant base and reducing their dependence on a few top tenants. Embassy REIT’s in-place rent was at around ₹87 per square feet with renewal spread at 9 per cent and releasing spread at 12 per cent. For Mindspace REIT, in-place rent during the quarter was ₹70 per square feet with re-leasing spread at 23.9 per cent. Brookfield REIT ended Q1 with in-place rent of ₹94 per square feet aided by 11.1 per cent average escalation and 13 per cent re-leasing spread.