Good news for REIT investors! Surge in office rentals to make returns even sweeter

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Updated: Oct 25, 2019 1:53 PM

Within first six months of its listing, India's first REIT – Embassy Office Parks REIT – has generated an absolute return of around 33 per cent and also declared a quarterly dividend of Rs 5.4 per unit in August 2019.

Real Estate Investment Trust, REIT, Embassy Office Parks REIT, real estate investment, office rental, IT/IT-SEZ office space, REITable assets, REIT investmentsAs the REITs predominantly invest in rent-earning properties, rental growth would result into higher returns.

Within first six months of its listing, India’s first Real Estate Investment Trust (REIT) – Embassy Office Parks REIT – has generated an absolute return of around 33 per cent and also declared a quarterly dividend of Rs 5.4 per unit in August 2019. As the REITs predominantly invest in rent-earning properties, there is more good news for the investors, as there is good prospect for even higher returns as strong demand for offices coupled with low vacancy have led to rental growth.

According to a JLL report, rentals in office spaces in IT/ITeS dominated cities such as Bengaluru, Hyderabad and Pune, have grown by more than 5 per cent on a Y-o-Y basis during the third quarter of 2019 as compared to the corresponding period in the previous year.

Except NCR, other six top cities have register growth in office rental with Hyderabad registering highest y-o-y growth of 9 per cent, followed by Bengaluru (6 per cent), Pune (5 per cent), Chennai (4 per cent), Kolkata (3 per cent) and Mumbai (1 per cent).

While strong demand has restricted vacancy levels to single digits despite addition of more than 5 million square feet in Hyderabad and more than 3 million square feet in Bengaluru in Q3 2019, according to the JLL report, Mumbai and Delhi-NCR are the only exceptions, where office rentals have not shown any movements.

Although, most sought-after business districts in both the cities, like BKC in Mumbai and DLF Cyber City in Delhi-NCR are experiencing vacancy levels less than 5 per cent with healthy rental movements, but as a whole, there are many peripheral and suburban business districts in these two cities, with high vacancies, leading to almost non-existent rental movements when observed from a macro-level.

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As a result, while Mumbai experienced only 1 per cent y-o-y growth in office rental per square feet per month, it has actually decreased in Delhi-NCR by 1 per cent.

However, availability of developable land and higher rental arbitrage is making it easier for occupiers to look at the top cities and beyond.

With most of the top cities are becoming preferred destinations for occupiers who are expanding their footprint, it is undoubtedly a good news for REITs and the investors as IT/IT-SEZ office space is going to dominate REITable assets across the country.

While other asset classes like retail, warehousing and hospitality likely to offer scope for REIT investments in future, residential REITs, however, still looks a distant reality due to low rental yields major roadblocks.

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