Commercial Real estate stocks in focus after Ministry of Commerce amends SEZ regulations

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Shares of leading commercial real estate players gained up to 3% on Friday following the recent amendment to the regulations for special economic zones (SEZs) by the Ministry of Commerce allowing the companies to use their vacant spaces for non-IT and ITeS purposes.

With the government’s decision to amend the SEZ rules and allow floor-wise denotification, real estate firms dealing in commercial space and office buildings expect occupancy levels to increase.

The government notified the changes to the SEZ regulation in a memorandum issued on Wednesday allowing the developers in Information Technology (IT) and IT-enables services (ITeS) SEZs to use their vacant spaces like domestic tariff areas (DTAs) for purposes other than IT and ITeS purposes, subject to board approval and certain conditions.

Before the amendment, denotification was permitted building-wise which resulted in large portions of SEZs remaining vacant. Now, the amendment to the SEZ Rules 2006 says that a part of the SEZ should be declared a ‘non-processing area’ and ‘free zone rules would not apply’ to such spaces. The non-processing area would help the real estate players to utilise more spaces without the various compliances, as needed earlier.

The leading commercial real estate firms like DLF Ltd, Brookfield India Real Estate Trust Ltd, and Embassy Office Parks REIT, among others, were in focus on Friday after the amendments to the SEZ rules.

Shares of DLF surged as much as 2.35% to hit a fresh 52-week high of ₹663.9 apiece on BSE. Earlier, DLF said that the real estate industry has been waiting for SEZ guidelines to come out soon. Seeking amendments to the SEZ rules, the company said that its commercial segment was doing well except for the SEZ sub-category.

Another leading commercial space developer, Brigade Enterprises, earlier said that no major movement in the SEZ regulations was impacting its leasing business. Shares of Brigade enterprises gained as much as 1.47% to a high of ₹853.1 apiece on BSE on Friday after the government’s recent amendments to SEZ rules.

Meanwhile, brokerage Ambit Capital said that the amendment to SEZ rules is a positive development for India’s commercial real estate sector. The average vacancy as of October 2023 was 17%, and the flexibility allows REITs to cater to a broader customer base, the brokerage observed.

Ambit Capital said that the listed REITs, like Embassy Office Parks and Brookfield India Real Estate Trust, have a higher share of SEZ in their portfolio and the change in rules will improve the occupancy rate and rental yield.

On the other hand, global financial services firm Morgan Stanley said that the share price of the Embassy Office Parks REIT will rise relative to the index over the next 60 days. “We expect new regulations to allow the SEZ area to be leased faster in the future,” Morgan Stanley said.

Shares of Brookfield India Real Estate Trust Ltd gained as much as 3% to hit a high of ₹254 apiece on BSE. However, the stock pared its early gains and was trading at ₹252.99 apiece, up 2.5%, on BSE at 12:55PM.

Shares of Brigade Enterprises were trading 1.81% lower at ₹ 823.15 apiece on BSE at 12:55 PM while the shares of Embassy Office Parks REIT were up 1.82% at ₹324.78 apiece on BSE.

Shares of DLF Ltd were trading 0.42% lower at ₹646 apiece on BSE at 12:58 PM.

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