India's Net Office Leasing to Witness 10-12% Growth This Fiscal
Driven by higher-than-expected leasing demand from GCCs, BFSI, and manufacturing sectors, net leasing of Grade A commercial offices in India is expected to grow 10-12% this fiscal.
Office LeasingCommercial Real EstateGccsBfsiManufacturingCrisil RatingsReal Estate MumbaiAug 28, 2024
Improved absorption will stem rising vacancy levels, partly aided by denotification in underperforming special economic zones (SEZs) units. This will improve cash accruals of commercial real estate entities rated by CRISIL Ratings 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 top cities, indicates as much.
Net leasing will pick up pace this fiscal after four years of gradual recovery, while commercial office supply is expected to remain high, similar to last fiscal.GCCs, which encompass all 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 footprint. India remains an attractive destination for global firms to set up captive units because of competitive office rentals and 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 continued recovery this fiscal with high demand absorbing the elevated supply. As a result, the vacancy level, which had shot up 600 basis points (bps) between fiscals 2020 and 2024 amid the pandemic, is expected to plateau at 17.4-17.5% this fiscal,” said Gautam Shahi, Director, CRISIL Ratings.Information technology (IT)/ IT-enabled services (ITeS) companies, which account for 20-25% of overall demand, will grow in low single digit due to tepid growth of domestic firms though demand from IT/ITeS GCCs will hold steady.
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 offshore demand through GCCs.Flexible workspace operators--key occupiers in recent fiscals amid the continuing trend of hybrid work structures--will see healthy traction due to their customisable workspace offerings and relatively flexible lease terms.
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, is another plus.mproving net leasing demand and the amendment to the SEZ Act, 2005, will benefit the CRISIL Ratings commercial real estate portfolio, where SEZs form 85% of the vacant stock. With 35-40% of the vacant SEZ stock expected to be demarcated in the next two fiscals, cash accruals for the CRISIL Ratings portfolio will increase by 9-10% this fiscal,” said Pranav Shandil, Associate Director, CRISIL Ratings.
Increased cash accruals will strengthen players’ credit profiles as we expect ratio of debt to earnings before interest, taxes, depreciation, and amortisation (Ebitda) improving to 4 times this fiscal from 4.4 times last fiscal.Any slowdown in global or domestic economic growth and its impact on hiring and overall business plans of companies could impact leasing and will bear watching, the ratings agency added.About CRISIL Ratings CRISIL Ratings is a leading credit rating agency in India that provides ratings and research on various sectors, including commercial real estate.
Frequently Asked Questions
What is the expected growth in net office leasing in India this fiscal?
10-12% growth to 41-43 million sq ft
Which sectors are driving the demand for office space in India?
GCCs, BFSI, and manufacturing sectors
What is the impact of the amendment to the Special Economic Zones Act, 2005, on the commercial real estate sector?
It allows floor-wise denotification of IT/ITeS SEZs, addressing their low occupancy levels
What is the expected impact of the growth in net office leasing on the credit profiles of commercial real estate entities?
Increased cash accruals will strengthen players’ credit profiles
What are the potential risks to the growth in net office leasing in India?
Any slowdown in global or domestic economic growth and its impact on hiring and overall business plans of companies
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