Grade-A office spaces are seeing faster absorption buoyed by favourable demand-supply dynamics, thus pushing vacancies lower. All-India (aggregate of top-seven cities) vacancy levels in the December quarter (Q3FY26) declined further to 12.3% from 12.7% in Q2 and 13.9% in Q3FY25, showed Propstack data compiled by Kotak Institutional Equities.
Global capability centres (GCCs) and flexible-space operators continue to dominate demand. Once a heavyweight, the share of information technology (IT) sector in the leased area has fallen to around 30% from 43-45% three years ago.
Amid worries of AI-led disruption to traditional IT business models, a likely reduction in hiring by IT firms could drag the sector’s leasing share lower. Fortunately, GGCs are holding the fort, setting off the adverse impact.
ICICI Securities estimates pan-India Grade-A net absorption of 55 million square feet (msf) in 2026, 58 msf in 2027 and 61msf in 2028, with over 50% of this demand to be driven by GCCs. Net absorption is the total occupied square feet minus vacant area during a specific period.
Growth levers
Most of the five listed Reits are already above 90% committed occupancy with targets to further improve to 93-94% by FY26-end. Committed occupancy rate includes properties where leases have already been signed with tenants, but are yet to commence.
Steady improvement in occupancy levels means better rental growth and distribution per unit (DPU). DPU is the total income (such as rental income or dividends) a Reit distributes to its investors per unit held.
Listed Reits delivered 8–15% year-on-year DPU growth in FY25, said ICICI; it expects double-digit DPU growth in FY26 for its coverage universe, with distribution yields at 6–7% over FY26–27.
Higher occupancy means Reits now need more space to lease out, and that is key to fuel future growth. So, they are expanding via acquisition of office assets and investing in under-construction office projects.
In Q3FY26, Brookfield India Real Estate Trust entered the Bengaluru market with the acquisition of a large Grade-A office campus spanning 7.7msf ‘Ecoworld’.
Mindspace Business Parks Reit has 3.6msf under-construction area and acquired three prime commercial assets from its sponsor K Raheja Corp.
Embassy Office Parks Reit has 7.6msf under-construction area and acquired a non-SEZ office asset called Pinehurst, located within Embassy GolfLinks in Bengaluru. Nexus Select Trust bought a prime retail space in Nexus Elante Complex in Chandigarh.
To fund expansion, Reits have raised capital. “Over Q3FY26, Reits under our coverage raised around ₹5,320 crore of equity and around ₹4,300 crore of debt capital,” said BOB Capital Markets report dated 20 February.
With no material drop in the average cost of debt expected over FY27 as interest rates bottom out, BOB cautions that should borrowing rates increase over FY27-28, Embassy and Mindspace would be most exposed to refinancing risk with nearly 48% and 46% of total outstanding debt maturing over the period, respectively.
Regulatory tailwinds have also boosted sentiment. Reclassification of Reits by Sebi as equity instruments from hybrid, paves way for increased institutional investor participation.
Reserve Bank of India’s recent draft circular has proposed allowing banks to lend to listed Reits meeting specific criteria. This should help Reits raise long-term capital at an efficient cost. So far so good.
Shares of Reits have rallied 16-33% in the last one year, outperforming the Nifty 50 index. But as supply increases, stagnation in occupancies or vacancy levels can spoil the party. Also, for now, there is no clarity on how AI impacts demand for office spaces.