Net office leasing to grow 10-12% to 41-43 million sq ft this fiscal: CRISIL Ratings

MUMBAI: Driven by higher than expected leasing demand from global capacity centres (CCG), banking, financial services and insurance (BFSI) and manufacturing sectorsGrade A net lease commercial offices In India, the acreage will grow by 10-12% to the pre-pandemic level of 41-43 million sq ft this fiscal year, he said. CRISIL Ratings.

Improved absorption will curb rising vacancy levels, partly helped by denotification in underperforming special economic zones (Special economic zones) units. This will improve the cash accumulations of the commercial real estate entities rated by the rating agency and, in turn, their credit profiles.

A CRISIL Ratings analysis of office space owners with debt of over Rs 70,000 crore and total leasable area of ​​around 150 million sq ft, accounting for 20% of Grade A office space in seven major cities, indicates this.

Net leasing is expected to pick up pace this fiscal year after four years of gradual recovery, while commercial office supply is expected to remain high, similar to the last fiscal year, the study showed.

GCC countries, spanning across sectors, are expected to account for 40-45% of India’s total net leasing this fiscal, as new entrants set up office spaces and existing ones expand their presence. India remains an attractive destination for global companies to set up captive units due to competitive office rents and the availability of a skilled and diverse talent pool in cities such as Bengaluru, Chennai, Pune, Hyderabad and Gurugram.

“Overall, the Indian commercial office space industry is poised for a continued recovery this fiscal, with high demand set to absorb elevated supply. As a result, the vacancy level, which had shot up 600 basis points (bps) between FY20 and FY24 amid the pandemic, is expected to stabilise at 17.4-17.5 per cent this fiscal,” said Gautam Shahi, Director, CRISIL Ratings. Information technology (IT)/IT-enabled services (ITeS) companies, which account for 20-25 per cent of overall demand, will grow in the low single digits on the back of tepid growth in domestic companies, though IT/ITeS demand from GCCs will remain stable. Healthy demand from the engineering and manufacturing and BFSI sectors, which together account for 35-40% of net leasing demand, will be driven by continued growth of the Indian economy and foreign demand across the GCCs.

Flexible workspace operators (key occupiers in recent fiscal years amid the continuing trend of hybrid work structures) will see healthy traction due to their customizable workspace offerings and relatively flexible lease terms.

Another advantage is the December 6, 2023 amendment to the Special Economic Zones Act, 2005, which allows floor-wise denotification of IT/ITeS SEZs, addressing their low occupancy levels.

“Improving net leasing demand and amendment to the Special Economic Zones Act, 2005 will benefit CRISIL Ratings’ commercial real estate portfolio, where Special Economic Zones constitute 85 per cent of the vacant stock. With 35-40 per cent of the vacant stock in Special Economic Zones expected to be ring-fenced in the next two fiscals, cash accruals for CRISIL Ratings’ portfolio expected to increase by 9-10 per cent this fiscal,” said Pranav Shandil, Associate Director, CRISIL Ratings.

Rising cash accumulations will strengthen players’ credit profiles as we expect the debt-to-earnings before interest, tax, depreciation and amortization (Ebitda) ratio to improve to 4x this fiscal from 4.4x last fiscal.

Any slowdown in global or domestic economic growth and its impact on hiring and companies’ overall business plans could impact leasing and will need to be watched closely, the rating agency added.