Domestic commercial office real estate investment trusts (REITs) are poised to increase their leasable area by 40-45 million square feet (MSF) to reach 190-195 MSF by the end of the next fiscal year, representing a growth of 25-30 per cent, according to a report by Crisil Ratings. This expansion is fueled by planned asset additions and the recent listing of a new REIT.
Credit Profiles Remain Healthy
Crisil Ratings noted that credit profiles of these REITs are expected to remain robust, supported by steady rental income growth, high occupancy levels, and controlled leverage. The analysis covered five listed commercial office REITs, including the one listed in the current fiscal year.
Of the anticipated 40-45 MSF increase in leasable area, 16 MSF will come from the recent listing of a new REIT. Inorganic additions of operating assets are expected to dominate, as this approach shields REITs from construction-related risks. Since the first REIT listing seven years ago through fiscal 2026, 75 per cent of total asset additions have been through acquisitions.
Demand Driven by Key Sectors
Demand for commercial office space remains robust across multiple sectors. Gautam Shahi, Senior Director at Crisil Ratings, stated, "Addition in commercial office space is accompanied by healthy demand growth from flexible workspace operators, banking, financial services and insurance institutions, and global capability centres cutting across sectors." He added that the good location and high quality of these assets will keep occupancy at a stable 92-93 per cent for REITs this fiscal, higher than the overall commercial office sector.
Profit Margins and Funding
The sustained strong occupancy, combined with contracted rental escalations, will enable REITs to maintain a healthy EBITDA margin of about 70 per cent, supporting cash flows. However, since REITs distribute most surplus cash flows to unitholders, asset additions will need to be funded through debt. Despite this, Crisil expects the overall loan-to-value ratio to remain stable at 26-28 per cent through fiscal 2028, similar to March 2026 levels, as growth in debt is offset by a commensurate increase in gross asset value based on discounted cash flows. Right of first offer on assets developed or acquired by sponsors on their own platforms will continue to support growth.
Diversified Portfolios Mitigate Risks
REITs' business profiles remain supported by diversified asset portfolios across sectors and geographies. The top three sectors and top three locations account for approximately 70-75 per cent and 60-65 per cent of total leasable area, respectively. Crisil noted that any potential disruption caused by artificial intelligence or a global slowdown impacting occupancy, as well as any further listing of REITs, will be key factors to monitor.
