Even as concerns grow over the residential real estate market reaching its peak, the outlook for office real estate remains strong, with listed real estate investment trusts (Reits) standing to benefit from sustained demand in the segment.
A recent HSBC report flagged early signs of a slowdown in the residential sector.
Analysts Puneet Gulati and Akshay Malhotra highlighted factors such as declining unit sales, uneven city-wise performance, plateauing apartment sizes, and a bottoming out of unsold inventory as indicators of a maturing market.
While some brokerages have cut estimates and target prices for listed residential players, commercial real estate and Reits have drawn investor interest.
These stocks have outperformed broader markets this year, buoyed up by steady leasing activity and consistent dividend growth.
According to analyst Abhinav Sinha of Jefferies Research, office Reits have outpaced the BSE Realty index by 20-30 percentage points year-to-date after two years of underperformance.
He attributes this turnaround to strong office demand, declining yields, and valuations trading below net asset value, which have supported Reits even amid broader market weakness.
Demand driving gains
The key catalyst for Reit performance has been the surge in office space demand.
Cushman & Wakefield reports that India s office market saw record net leasing of 50 million square feet (msf) in 2024, surpassing the previous 2019 peak by 16 per cent.
Vacancy rates have dropped to 16 per cent, their lowest since the pandemic, as new supply remained limited at 43 msf.
This led to a 220-basis-point decline in vacancy levels.
Demand was led by the information technology and allied sectors, which accounted for 30 per cent of total leasing, followed by banking, financial services and insurance (17 per cent), engineering and manufacturing (17 per cent), and flexible workspaces (14 per cent).
Flexible (flex) workspaces, in particular, have gained traction over the past four years due to capital efficiency, cost savings, employee well-being, and operational outsourcing, according to CBRE.
The total flex space stock has quadrupled since 2018 to 80 msf, growing at an annual rate of 24 per cent.
It is projected to reach 125 msf by 2027.
Outlook and investment trends
Rajashree Murkute, senior director and head corporate and infra ratings at CareEdge Ratings, sees the Indian Reit market on track for further expansion, supported by upcoming Reit launches and a strong pipeline of high-quality, Reit-worthy assets.
She expects continued growth driven by Grade A commercial real estate and rising investor interest across sectors.
Jefferies Research suggests that tightening office supply and potential rent increases could push valuations higher, with net asset values set to rise.
The firm has a buy rating on Embassy Office Park Reit and Mindspace Business Parks Reit.
Geojit Research maintains a positive outlook on Mindspace Reit and Brookfield India Real Estate Trust, citing stable distribution growth, improving occupancy rates, rental escalations, ongoing projects, and opportunities for inorganic acquisitions.
JM Financial Research ranks Embassy Office Parks as its top pick, noting that the company leased 5 msf in the first nine months of 2024-25 (FY25) and is on track to meet its full-year leasing target of 6.5 msf. Its 7.4-msf development pipeline offers further growth visibility.
Analysts led by Sumit Kumar project a 12 per cent net operating income increase through 2026-27 and maintain a buy rating with a target price of Rs 425, reflecting a total return potential of 23 per cent, including a 7 per cent dividend yield and 16 per cent capital appreciation.
ICICI Securities upgraded Nexus Select Trust last month, citing potential upside from mark-to-market opportunities, 5-6 per cent portfolio rental growth beyond 2025-26, and value-accretive acquisitions that could drive 6-7 per cent annual capital appreciation on top of distribution yields.
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