Absorption trends (CY2017 - to date) (msf)

Source: CBRE Research, Embassy REIT

1Q CY2021 highlights

  • Leasing momentum slowed down to 6.4 msf in Q1 CY2021, 30% lower than previous quarter
    (i) Occupier sentiment impacted with resurgence in COVID-19 cases across all major cities
    (ii) Occupiers continued to pause new deals unless driven by immediate business needs
  • Bengaluru and the technology sector were major demand drivers, contributed to 45% and 35%, respectively of pan‑India absorption
  • Despite the resilience, timing of real estate plans to be impacted by the second wave related uncertainty

City-wise performance – (April 2020-March 2021)

City Absorption(1)(msf) Supply (msf) Vacancy (%) Bengaluru 10.9 10.4 8 Pune 1.9 1.8 12 Mumbai 1.7 2.6 24 NCR 4.1 5.2 26 Embassy REIT markets 18.6 20.1 17 Hyderabad 6.7 9.8 15 Chennai 3.6 3.3 12 Kolkata 0.4 0.1 36 Other markets 10.7 13.2 17 Grand Total 29.2 33.2 17

Source: CBRE Research, Embassy REIT

Notes: (1) Represents gross absorption figures

Market Commentary

Demand trends

Office leasing expected to gain traction by end CY2021 based on broad based vaccine rollout. Institutionally owned high-quality properties with focus on wellness to benefit.

Proforma demand analysis

Gross absorption (msf)

Source: CBRE Research, C&W Research, Embassy REIT

Outlook

Short-term

  • Spike in active COVID-19 cases has pushed occupiers to pause and postpone their real estate decisions prompted
  • Demand likely to remain subdued in the short term
  • Broad-based vaccine roll out to help revive business sentiments and drive demand

Medium-term

  • Resurgence in demand to depend on time taken to contain second wave and to roll out vaccines
  • A pickup in leasing activity is expected in the second of CY 2021, with a full rebound likely in CY 2022
  • Demand likely from large occupiers to plan for their growth, large-scale consolidations/expansions to come back gradually

Portfolio implications

  • Existing REIT portfolio to remain resilient given asset and occupier quality, long WALE and below market rents
  • Limited risk on 14% contracted escalations on 7.7 msf leases in FY2022
  • ESG and wellness priorities to drive demand - large campuses and institutionally owned properties such as Embassy REIT are to benefit

Supply trends

Supply shrinkage of over 25% since the start of the pandemic. Supply expected to recover modestly post demand picks up momentum towards end of CY2021.

Proforma supply analysis

Source: CBRE Research, Embassy REIT

Note: Comparable and competing supply has been arrived factoring supply considerations, including city, micro‑markets, location, project completion timing, quality etc.

Outlook

Short-term

  • Supply slippages likely to continue due to resurgence of COVID-19 infections
  • Localised restrictions to delay projects nearing completion with no pre-commitments
  • Planned projects on hold, conservative approach to start new construction

Medium-term

  • CBRE’s 2 year forward supply estimate has decreased by 25% from 119 msf in January 2020 to 89 msf in April 2021
  • Supply likely to recover modestly when demand picks up pace towards the end of 2021
  • Increased emphasis on infrastructure, quality to result in a shift in preference from old to new office buildings

Portfolio implications

  • Competing supply for REIT is significantly lower at 11% of announced supply for the next 2 years
  • 1.1 msf due for delivery in September 2021 already 100% pre-leased. No other near-term new supply until FY2023
  • REIT has sufficient financing in place to finance organic growth through on campus development