Consumption growth would have been sequentially subdued for Blackstone-backed Nexus Select Trust, but this is expected to change over the next 12-18 months, according to Morgan Stanley Research which has raised the price target of the real estate investment trust to ₹150 a unit and upgraded the stock to overweight.

The research note explained it had upgraded the stock as the total return of 20 per cent made it attractive. The total return is split between 6 per cent stock price upside, 7 per cent dividend yield and 7 per cent annual growth.

Nexus vs Phoenix

Nexus Select owns 17 malls and its closest competitor in the segment is Phoenix Mills which has over 10 malls. MS Research pointed out that Nexus Select has underperformed Phoenix Mills since its listing. This has been primarily because Indian investors prefer growth over yield, REITs in India have not seen much growth in distributions and Phoenix Mills net profit growth of 25-30 per cent is more attractive than Nexus Select’s 12-15 per cent growth.

Nexus Select’s net operating income would have risen at a lower rate in the June quarter compared to Q4 of FY24.

The underperformance is, however, seen reversing over 12-18 months with growth rates of both companies stabilising at 12-15 per cent in that time. With the malls under Phoenix Mills maturing, growth will moderate. Nexus Select could complete the acquisition of the malls it has targeted in Hyderabad which will boost growth. The research note said Nexus should be able to post high single digit growth of 7 per cent in payouts. At 88 per cent, the REIT also has a higher revenue contribution from its retail segment than Phoenix at 63 per cent.

Nexus Select has good growth potential as its asset portfolio appears well positioned for strong organic growth through a combination of contractual rent escalations, increased tenant sales and re-leasing at higher market rents.

Phoenix Mills had a better rental yield in Q4FY24 at 11 per cent, compared to 10 per cent for Nexus. Like-for-like consumption in the malls of both companies saw a fall in Q4. Phoenix Mills saw a 400 bps rise in trading occupancy while that of Nexus saw a fall of 50 bps, but occupancy was higher.

“We believe malls, when done well, can differentiate themselves meaningfully, so much as to command even double the rent of another mall in the same location,” said MS Research, adding, “offices are generally commoditized products, and risk of oversupply can be very high over time.”