Real Estate Investment Trusts (REITs) are firmly back on their growth trajectory, with Indian-listed office REITs delivering their first clean year of distribution per unit (DPU) growth in FY25 at 8-15%, according to the HSBC Global Research note. "We expect 8-13% CAGR growth in DPU from FY25- 27 as well. All this will be driven by increasing occupancies," the note states.

Similarly, after two years of muted net asset value (NAV) growth in FY23/FY24, FY25 witnessed NAV growth of 1-13%. While Brookfield India Real Estate Trust (BIRET)'s growth was a drag at 1% year-on-year due to new units being issued at a discount to NAV, Mindspace grew 13% as market rentals rose in its key markets, and new project additions/completions contributed to growth. "We expect similar 5-8% NAV growth for our covered REITs in FY26 as well. All these are driven by marginal rental growth as office spaces reach near-optimal occupancies; new completions add to the value growth. REITs have outperformed NIFTY50 in the last 1 year," the report highlights.

Asset additions are also anticipated, with all REITs indicating their intent to acquire new assets. Favourable tax regulations for the REIT structure, visible strength from sector consolidation, the need to churn out assets from private to public portfolios, moderate debt levels, a favourable rate environment, and now a reduced discount to NAVs make it conducive for REITs to expand their portfolios, the note suggests.

The leasing outlook remains strong, despite global market uncertainties, and tenants for office REITs have yet to indicate any change in expansion plans, the report reveals.

"Large proposals of 18-26 million square feet of leasing are still out for bidding. REITs indicate a strong pipeline for growth. In FY25, occupancies grew 200-600 basis points (BIRET added 600bp to reach 88%, EOP added 200bp to 87%, and Mindspace added 200bp to 91%). We see our covered REITs crossing 90% levels (on a same-store basis) by the end of FY26, setting the stage for marginal rental growth."

HSBC views REITs as one of the best plays for the rate cut cycle. "Debt held by REITs accounts for 24-40% of GAV, and we expect REITs to benefit from DPU growth and cap rate compression amid interest rate cuts."

The brokerage has maintained a "buy" rating on Embassy Office Parks (EOP) and BIRET, with target prices of ₹435 (previously ₹430) and ₹330 (previously ₹320), respectively. "EOP and BIRET have high-quality Grade A assets and an environment of clear preference for high quality. We value both with DCF; our higher TP factors in higher growth in relevant market rentals."

The risks pertain to a prolonged IT slowdown and delayed leasing decisions.