Indian real estate investment trusts (REITs) could deliver double-digit total returns as strong leasing demand from global capability centres (GCCs) and rising distributions support the sector, according to Morgan Stanley.
The brokerage remains bullish on Mindspace Business Parks REIT, Nexus Select Trust and Knowledge Realty Trust, retaining an 'Overweight' rating on the three. At the same time, it downgraded Embassy Office Parks REIT to 'Equal-weight' and Brookfield India Real Estate Trust to 'Underweight'.
Morgan Stanley said Indian REITs have gained about 20% over the past two years, rising nearly 33% when distributions are included. This compares with a 12% decline in the Sensex over the same period. The brokerage attributed the outperformance to improving distributions per unit (DPU) growth and strong leasing activity led by GCCs.
The outlook for office demand remains positive, with Morgan Stanley citing Nasscom estimates that India's GCC base could expand by around 1.4 times by FY30. The expansion is expected to provide continued support to office leasing demand. However, rising office supply and higher interest rates remain key risks for the sector.
Indian REITs are expected to post DPU growth of 9-12% in FY27, according to Morgan Stanley, compared with 0-7% growth projected for regional peers. Yields are expected to remain broadly comparable, at around 5.5-6.7%.
Mindspace remains top pick
Morgan Stanley raised its target price for Mindspace Business Parks REIT to Rs. 550 from Rs. 490 while retaining its 'Overweight' rating. The brokerage estimates a total return of 16.8%, the highest among the REITs under its coverage.
Mindspace currently has an occupancy rate of 91% and around 20% mark-to-market rental potential, indicating room for rental growth as leases are renewed. Its development pipeline is equivalent to about 14% of its gross leasable area.
Recent acquisitions are also expected to contribute for a full year, adding to the REIT's earnings potential.
Morgan Stanley also pointed to Mindspace's data centre portfolio as a potential growth driver. The portfolio comprises five assets spanning around 1.7 million sq ft, with capacity of more than 250 MW.
Embassy REIT downgraded
Morgan Stanley cut Embassy Office Parks REIT to 'Equal-weight' from 'Overweight' and lowered its target price marginally to Rs. 455 from Rs. 460.
The brokerage expects Embassy to deliver 10% year-on-year DPU growth in FY27. However, it sees limited scope for growth beyond that. With occupancy already at 91%, further gains from higher occupancy could be constrained, while estimated mark-to-market rental potential stands at around 10%.
Brookfield faces growth concerns
Brookfield India Real Estate Trust was downgraded to 'Underweight' from 'Equal-weight', with the target price reduced to Rs. 330 from Rs. 340.
Morgan Stanley noted that Brookfield completed acquisitions of around 10 million sq ft between FY23 and FY26. Despite the expansion in its portfolio, DPU grew at a compound annual growth rate of only 2% during the period.
The brokerage said the relatively modest DPU growth points to limited earnings accretion from the acquisitions, weighing on the near-term outlook.
Knowledge Realty target cut
Morgan Stanley retained its 'Overweight' rating on Knowledge Realty Trust but lowered its target price to Rs. 120 from Rs. 127.
Overall, the brokerage expects Indian REITs to remain supported by strong GCC-led office demand and improving distributions. However, the outlook is increasingly differentiated across individual trusts, with occupancy levels, rental reversion, development pipelines and the ability to translate acquisitions into DPU growth emerging as key factors for investors.
