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BENGALURU: Two waves of the covid-19 pandemic have hit office Real estate investment trusts (Reits) in India as remote working leads most tenants to defer their leasing decisions.

Vacancy levels at offices have risen 4-6% since the first wave of the pandemic (in 2020-21), and may rise by anot 2-3% in the first half of this fiscal, ICICI Securities Ltd said in a report on Thursday. The trend may, however, reverse in the second half of this fiscal if a ramping up of the vaccination programme leads to a gradual return to offices and a potential revival in international travel.

In terms of performance, all the three office Reits—Embassy Office Parks, Mindspace Business Parks and Brookfield India—saw strong rental collections of more than 99% last fiscal and were able to achieve double-digit increase in occupiers who have renewed lease contracts along with along with escalations in rent as per contractual clauses.

“Indian Reits saw strong rental collections but a dampener was reduction in overall portfolio occupancy levels by 4-6% on like-to-like basis for Embassy and Mindspace REIT, while Brookfield REIT retained flattish occupancy levels in the second half of 2020-21. This was owing to exits by tenants for scheduled expiries and early exits as well," said Adhidev Chattopadhyay, analyst, ICICI Securities.

Brookfield India Reit, which made a public listing in February, recorded a resilient performance in 2020-21 with growth in operating lease rentals and good rental collections. However, in FY21, of the 1.0 million sq. ft of scheduled expiries, the Reit manager has achieved 54% renewals on term expiries while discussion on the balance expiries of 0.40 million sq. ft has been postponed to 2021-22, ICICI Securities said.

As a result, the Brookfield India Reit now has 1.1 million sq. ft of area expiring in 2021-22 (including FY21 rollover) of which it expects to renew at least 40-50% of the area based on conservative estimates.

“In our view, the outcome of renewal discussions for FY22E will hinge on the trajectory of the second wave in India with an earlier-than-expected return to offices increasing the chances of renewals/new leasing while an extended work-from-home situation may lead to tenants giving up space and remains a key monitorable," according to the report.

Despite the short-term disruptions caused by the second wave, India’s long-term advantages as an office hub continues due to factors such as affordable real estate costs and availability of talent.

For Embassy Reit, “business as usual" churn is expected this fiscal with 1.9 million sq. ft upcoming (lease) expiries, comprising 6% of revenue, according to the report.

“…We also see a growing need to return to offices as soon as the situation improves and as offices continue to be preferred places to work, providing an inclusive environment for employees to ideate, collaborate and optimize output. These are expected to lead to renewed demand for Grade A commercial real estate," Vinod Rohira, chief executive officer, Mindspace REIT said in May.

Embassy Office Parks Reit expects leasing sentiment to remain muted for a couple of quarters before picking up in the latter half of 2021-22.

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