Morgan Stanley anticipates robust double-digit total returns for Indian Real Estate Investment Trusts (REITs), attributing this optimistic outlook to sustained leasing demand from global capability centers (GCCs) and projected improvements in distributions to unitholders. The brokerage's latest report highlights a positive stance on the sector, despite acknowledging potential risks from increasing office supply and interest rate fluctuations.
Mindspace Business Parks REIT: Top Pick
Mindspace Business Parks REIT remains a top pick for Morgan Stanley, which has reiterated its 'Overweight' rating and increased the target price to Rs 550 from Rs 490. The firm forecasts Mindspace to yield the highest total return among its coverage, estimated at 16.8 percent. Key factors supporting this view include Mindspace's current 91 percent occupancy, significant mark-to-market (MTM) rental potential of around 20 percent, and a development pipeline representing 14 percent of its gross leasable area (GLA).
The report also emphasized Mindspace's growing data center portfolio, which comprises five assets totaling approximately 1.7 million square feet and over 250 MW capacity, as a substantial future growth driver.
Embassy and Brookfield REITs Downgraded
Conversely, Morgan Stanley has adjusted its ratings for other prominent Indian REITs:
- Embassy Office Parks REIT: Downgraded to 'Equal-weight' from 'Overweight', with a revised target price of Rs 455 (previously Rs 460). While the brokerage expects a 10 percent year-on-year DPU growth in FY27, it foresees limited growth beyond that. Embassy's occupancy stands at 91 percent, with an estimated MTM rental potential of 10 percent, suggesting restricted room for further improvement.
- Brookfield India Real Estate Trust: Downgraded to 'Underweight' from 'Equal-weight', and its target price cut to Rs 330 (from Rs 340). Morgan Stanley noted that despite Brookfield's acquisitions of about 10 million square feet between FY23 and FY26, its DPU grew by only 2 percent CAGR during the same period, indicating limited accretion from these investments.
Knowledge Realty Trust maintained its 'Overweight' rating, though its target price was slightly reduced to Rs 120 from Rs 127.
Sector Outlook and Risks
According to Nasscom estimates cited by Morgan Stanley, India's GCC base is poised to expand by approximately 1.4 times by FY30, creating a robust demand environment for office spaces. Indian REITs are projected to achieve DPU growth of 9-12 percent in FY27, outperforming regional peers whose growth is estimated between 0-7 percent, at comparable yields of 5.5-6.7 percent.
Despite this positive outlook, the report cautions about key risks, including the increasing supply of new office spaces and potential impacts from interest rate hikes.