Mindspace Business Parks REIT, sponsored by K Raheja Corp, leased nearly 1 million sq ft office space through 18 transactions during the quarter ended June and expects a stronger recovery in the second half of the current financial year due to a surge in demand after the pandemic. Vinod Rohira, chief executive at the REIT, discusses the rise of co-working spaces, the impact of hybrid work spaces on the REIT’s business and the outlook for leasing and rents in an interview with Raghavendra Kamath. Edited excerpts:
What is your outlook for leasing in the remainder of FY23? What kind of growth do you expect in leasing in FY23 at Mindspace REIT?
Post the pandemic, we have witnessed a sharp jump in demand for Grade A office spaces that rank high on health, wellness and safety protocols, along with the best asset management practices. Despite being in the shadow of two waves of the virus, Mindspace REIT had recorded one of the best years of leasing in FY22, at around 4.5 million sq ft in our REIT portfolio and an additional 2.9 million sq ft in our ROFO (right of first offer) portfolio. Tailwinds observed in the previous financial year continue to accelerate this year as well, as is evident in our leasing numbers of 0.9 million sq ft in Q1 FY23. As the percentage of employees returning to offices increases, companies expect to beef up their office space expansion plans to cater to the increased headcounts. We expect this to continue supporting the leasing momentum through FY23.
What is your outlook for rents in FY23 and FY24?
Rents have started firming up for Grade-A spaces due to a strong demand for quality assets. We have recorded a re-leasing spread of over 36% in Q1FY23. In addition, the high inflation and lack of liquidity coupled with rising interest rates are squeezing out speculative supply from the market. Institutionally backed developers are likely to be able to deliver on their commitments. However, they will have to bring it in at higher rents to cater to high inflation and higher interest costs, which are poised to push market rents north.
The pandemic surely saw an emergence of WFH within corporates. Even as the pandemic fades, hybrid working prevails. How has the new trend impacted the vacancy and rentals at your office parks?
In the long term, there will be some element of hybrid working. However, offices would be the mainstay of these models. As organisations increasingly understand the vital role the office space plays in fostering teamwork, collaboration, mentorship, creativity, and transmission of organisation culture and strategy from the senior management down to all levels of the organisation, they are encouraging employees to come back to the desks.
Organisations today demand experiential work environments that foster productivity, and at Mindspace REIT, we have used the downtime to upgrade assets to meet these ever-evolving requirements from the millennial workforce of India. In the Mindspace REIT portfolio, the trend of falling occupancy has bottomed out. In fact, we have seen our committed occupancy jump by 130 bps quarter on quarter in Q1 FY23. We continue to record contractual rental escalations and healthy mark-to-market spreads, as we had re-leasing spreads of over 36% in the past quarter (June 2022).
Co-working spaces have picked up momentum big time. How has it affected your business?
We do have co-working spaces in some of our business parks and we view them as complementary to our offerings. Through co-working spaces, organisations get an opportunity to experience first-hand, our distinct work ecosystem. When these companies decide to scale up, our business parks become the first port of call for prospective occupiers.
The stock markets have been extremely volatile recently. Amid this, investors’ interest in REITs increase, remain stable or decrease? Please share your thoughts on the same.
Globally, across developed financial markets, REIT is a well-accepted and mature investment product. In India, the journey of REITs has commenced only recently, and we expect the sector to gain depth in the years to come with more REITs getting listed. We are also working actively on enhancing the investor awareness of REITs as an instrument and expect the investor interest to only increase from hereon. In fact, Mindspace REIT has seen a 4.5x increase in unit holders, since listing. Also, Mindspace REIT has delivered total returns of over 47% in just 2.5 years till June 30, 2022 .
Startups are the key occupiers of commercial offices as well as co-working spaces. With massive layoffs in the startups, what will be the impact on the office sector?
India has one of the largest startup ecosystems. There are many emerging startups continually joining the unicorn club. We are excited about this space and look forward to growth of the startup ecosystem, translating into a larger footprint, and subsequent demand for Grade-A office space.
Any city where you expect challenges in terms of leasing or vacancy in FY23?
We do not foresee challenges with respect to vacancy as of now. In fact, we are seeing vacancies in our portfolio bottoming out and are expecting the occupancy to only rise from here on.