What makes ICICI Securities believe ‘Sunny days are ahead’ for REITs – Recommends to Embassy Office and DLF to Buy

After two years covid, the revival in REITs (Real Estate Investment Trusts) are seeing revival as the rental collections has jumped to 99 per cent, according to domestic brokerage ICICI Securities. However, it raises concerns about the near-term distribution yields for the sector.

Indian REITs have seen strong rental collections of over 99 per cent during over FY21-Q1FY23 and have been able to achieve healthy re-leasing spreads along with contractual escalations despite Covid disruptions, ICICI Securities said in its report on Real Estate.

Commentary from REIT managers and large office developers indicates that the fall in portfolio occupancies of 6-9 per cent seen in FY21-22 owing to Covid has bottomed out and occupancies are expected to reach pre-Covid levels of over 90 per cent by March-Jun3 2023, the brokerage said.

While rising global interest rates and in India is the key risk, this also coincides with an acceleration in office leasing and ICICI Securities expect cap rates to remain in the 8-8.5 per cent range or even lower for high-quality Grade A assets as market rentals have remained stagnant for 24 months.

While near-term distribution yields for Indian REITs over FY23-24E may appear low at 5-6 per cent, the brokerage remains constructive on REITs as they provide a stable cash flow profile.

Heading into FY23E, with interest rates rising globally and in India, there is a possibility of expansion in cap rates for Indian office assets to adjust to higher yield expectations.

In all there are four companies listed in this space - Embassy Office Parks REIT, DLF, Mindspace Business Parks REIT and Brookfield India REIT, for which the brokerages give BUY rating on the shares of first two and Hold for other two.