Analysts say, Embassy’s long-term fundamentals are intact, but a key near-term trigger for the stock is commentary on new leases
Rising preference for work from home led by the pandemic, weakened investors’ sentiment towards commercial real estate. Despite that, the Embassy Office Parks REIT has continued to witness strong rental collections.
In the second quarter, rental collections on 26.2 million square feet of operational office portfolio stood at 98.5%. In the June quarter, office rental collections were 99.9%, the company said in its latest operational update. Rental increased 11% across 18 office leases, with year-to-date rental increases of 12% across 40 office leases, it added.
“Embassy Office Park's rental collections for 2QFY21 remain robust and the recent quarterly update provides good visibility with 95% occupiers operating. This can be attributed to business stability of its top clients largely from the technology sector. Overall, the Grade A commercial property segment has managed to hold up pretty well in the current scenario," Mohit Agarwal, analyst at IIFL Securities Ltd said.
“Prima-facie these numbers look good. Improvement in rental allays come concerns about clients trying to renegotiate or ask for discounts in rent payments. In their post earnings conference call, its management sounded confident of decent rental collections. So, in that sense, this is in-line with what the management had indicated. However, granular details on trajectory of average rentals, renewal of contracts and new leases, which are key for the stock’s performance, will be known only when the results are announced," said an analyst with a multinational brokerage house requesting anonymity.
Little wonder then that the stock’s reaction to this development was muted. Shares of the company ended Thursday’s session on a flat note at Rs362.15 on the NSE.
Nonetheless, resilience of Grade A office properties bodes well for REITs as a product. REIT is a globally popular investment option, but in India it is still at a nascent stage in India. A concern was that work from home culture would weigh on developers having high office rental incomes. Embassy’s performance shows that this concern is overdone to an extent, analysts said. As per company's press statement, over 95% of its occupiers and over 15,500 employees operated from its properties in September 2020. This is much higher than the average of 8,500 employees who operated from its properties during the June quarter.
“The initial euphoria about improved productivity from work from home (WFH) has ebbed and now triggered employee burnout, organisation culture and team bonding concerns. In fact, employees have returned to offices wherever covid-19 has come under control (China, South Korea, Germany, France, etc.,) and leasing demand has picked up (including from tech giants like FAANG, which were at the forefront of WFH)," Edelweiss Securities Ltd said in a report on 23 September.
Improved investor sentiment for commercial realty could benefit the upcoming Brookfield REIT IPO. Canadian alternative asset manager Brookfield Asset Management aims to raise around Rs4400 crore through this offer. This will be the third REIT IPO to hit the market after Embassy Office Parks and Mindspace Business Parks REITs. Blackstone-backed Mindspace Business Parks Reit’s stock made its market debut in August at a 10% premium over its issue price of Rs275. The issue was oversubscribed 13 times.