REITs take a push back on realty’s strong performance after rate pause

IT companies are seeing a slowdown in hiring over the past few quarters and there is a decline in number of employees, which has led to a lower occupancy levels in office space

The Reserve Bank of India's (RBI) decision to withdraw its hawkish stance triggered a prolonged rally in real estate stocks, but it has slowed the momentum of Real Estate Investment Trusts (REITs) stocks.

“The topping out of interest rates in India has led to a sustained rally in residential developers; however, the REIT rally has not sustained as demand concerns persist,” said Jefferies in a report.

Embassy Office Parks REIT and Mindspace Business Parks REIT have underperformed Nifty Realty in the last two months when the central bank paused rate hikes.

IT companies are seeing a slowdown in hiring over the past few quarters and there is a decline in number of employees, which has led to a lower occupancy levels in office space, according to research reports accessed by Moneycontrol.

Since the start of the pandemic, average vacancy rate has increased by almost 500 basis points to 18 percent In March 2023 for top six cities according to the Jefferies report. While vacancy rates have corrected a bit, they still remain 400 basis points above the pre-pandemic levels. Vacancy rate is the percentage of built space in the markets that are currently unoccupied or are available for rent.

Around 9,000 employees were laid off from IT companies in the fourth quarter, leading to low demands for office spaces, said Kotak Institutional Equities.

Also read: RBI MPC meet: Realty stocks under pressure but analysts unperturbed

In the long run, Jefferies expects occupancy levels for Embassy Office Parks to increase by 300 basis points to 89 percent in FY26. It expects occupancy levels to increase by 700 bps in FY26 to 90 percent for Mindspace Business Office Parks. Occupancy rate is the ratio of rented or used space to the total amount of available space.

Jefferies has put a hold target on Embassy Office Parks at Rs 324 and a buy target on Mindspace Business Parks at Rs 338.

Embassy Office Parks closed 1 percent down at Rs 299 per share, while Mindspace Business Parks ended 0.9 percent up at Rs 309 apiece.